Indexed loan – What is it, definition and concept | 2022

An indexed loan is a type of bank loan characterized by linking the evolution of repayment interest to a certain ratio or external reference.

Within the wide spectrum of existing types of loans, the indexed loan is one whose life or market evolution is directly influenced by a reference index.

The interest rate applicable to its different installments will be defined by the reference established by the issuing bank.

In this way, these interests will evolve or fluctuate depending on the changes that said guide experiences.

Thus, with indexed or indexed loans, it is possible to create financing products or instruments of a very diverse nature in the financial field.

That said, currently the indexed modality is the most common in day-to-day banking and finance. This responds to the fact that the business model of this type of entity is based on the profits derived from the application of interest to its debtors.

Basic characteristics of an index loan

There are several features to highlight when conceptualizing an indexed loan:

  • Guide or reference index: Interest is often established following the life of a financial ratio or the remuneration of a certain value.
  • Effect of inflation: Sometimes linking the establishment of interest to a particular ratio can favor or harm depending on the evolution of prices.
  • Negotiated link: In most cases, the creditor entity offers alternatives to its clients when negotiating this type of loan or credit. Finally, both parties agree on the conditions of the same.
  • Previous estimate: In general, it is not possible to know in advance the interest that will be generated, given the volatility of the markets and the different ratios.
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Indexed loan and mortgage market

Although it is true that it is possible to find examples of indexed loans in a wide variety of economic fields, it is in the real estate field where one of its main exponents is located.

So it is with mortgage loans. These home purchase financing models are often governed by the evolution of an index, with the Euribor standing out among many others.

Another common alternative is to index a certain loan to the evolution of a foreign currency or, more exceptionally, the price of assets such as oil.

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