The loan in fine allows you to realize tax savings if your wealth is important. The Lombard loan meanwhile, is either unknown to the public, is associated with tax evasion. Yet it is not limited to this use! This article explains how these two types of loans work, and how they are used.
1. What differences exist between the in-fine loan and the Lombard loan?
What is a loan in fine?
In a loan in fine , the borrower only pays interest for the duration of the loan and reimburses the capital in one go at the last monthly payment.
The loan in fine is subscribed mainly for rental investments. Indeed, interest is constant throughout the term of the loan in fine unlike degressive interest on the amortizing loan . Since it is possible to deduct interest from property income when the client chooses the actual tax regime, the loan in fine is therefore a way to reduce its tax base .
Be careful: to take out a loan in fine, the bank usually asks for a pledge on an asset you own. Banks may require a personal contribution of a minimum of 30% of the price of the property. This contribution is called the initial pledge and is placed in a savings account. Most often, this product is life insurance. This pledge must be at the end of your loan at least 50% of the amount borrowed or equal to the initial capital.
What is a Lombard loan?
The Lombard loan is a special type of loan in fine, for which the bank requests a pledge on cash which the borrower owns, for example:
- Monetary placement
The bank therefore lends a certain amount that depends on the value of the assets, and the borrower repays it when he sells his assets.
More simply, Lombard credit is like a cash advance .
How much can I borrow with a Lombard loan?
You have a lot of money but you may not want to touch it right now (often on a life insurance or a PEA). This may be the case if you benefit from an attractive return or if you expect a revaluation.
The Lombard loan can be considered as a liquidity advance made by a bank. The amount lent depends on the “security” of the investment. As an indication, the bank is ready to:
- 100% for a euro fund
- 80% to 100% for life insurance
- 30% and 50% for stocks, depending on sector, company and distribution.
The amount lent will also depend on certain criteria, such as the diversification of your equity portfolio. The banker is not interested in your profile, but the assets you hold. The banker will first be interested in wealthy assets, before looking at your profile, as for a conventional loan.
Finally, depending on their positioning, the banks are more or less willing to make a Lombard loan. Not everyone agrees to provide this type of financing.
What are the modalities?
The Lombard credit rate is generally variable . It is based on reference rates such as the Euribor rate, to which the bank adds a margin of around 1%. These rates are often higher than those of traditional loans.
But the Lombard loan allows the borrower to benefit from a leverage effect : thanks to the borrowed funds, he can invest in new assets (real estate or financial), and thus generate a significant return.
2. How and why to use the Lombard loan
What about wealthy assets?
The borrower continues to receive interest and dividends on these assets.
If the market value of the pledged assets falls sharply, the lending institution may require additional collateral. In the case of non-repayment of your debt, the bank becomes the owner of the guarantee.
What are the types of Lombard credit?
There are different types of Lombard credit:
- current account credit
- the discovery
- the fixed term advance
The current account credit and the overdraft work in the same way, the amount of the loan is not fixed beforehand. The loan is close to the overdraft : the bank authorizes its client to draw funds as and when needed. The interest is then calculated on the sum used.
For the fixed term loan, the duration of the credit and the sum lent are fixed in advance. The amount is then paid into the borrower’s account, and interest is paid on that amount.
Lombard credit, the flagship tool of tax evasion?
Lombard credit is much blamed when talking about tax evasion. Indeed, it facilitates certain fraudulent practices in tax matters. The bank collects the borrower’s assets and recovers them if the borrower does not pay back the loan.
Thus, it can be used to hide undeclared assets abroad : the borrower takes out a Lombard loan and does not voluntarily repay his loan. The bank then takes possession of the assets without declaring the seizure , which empties the account illegally held with ease.
Or a way to lower taxes?
Lombard credit is also used to lower taxes while maintaining a comfortable lifestyle. A person subject to income tax with a high slice, and wealth tax, can optimize his wealth through a Lombard credit.
A company boss, subject to the ISF and a high proportion of IR, decides to pay himself a less important salary, to receive public aid and reduce his taxes.
In parallel, he takes out a Lombard loan, guaranteed on his life insurance policy. Thus, the bank pays him 600,000 euros, which are not taxed, since it is not income. He keeps his life insurance policy, which he will release in a few years, and can continue to live comfortably thanks to Lombard credit.