A loan is a financial operation where a country borrows a sum of money for immediate use. In return, the country pays interest over the next five years, and at the end of five years, must repay the principle. If a country cannot repay a bank loan, it goes bankrupt, which is generally a nasty thing you'll want to avoid.
Types of loans
There are two kinds of loans in the game: bank loans, and inter-country loans.
Bank loans are obtained from private sources, otherwise not represented in the game. They are only loans players will get, and so all unmodified use of "loan" in the EU2 wiki should be understood as a bank loan.
Inter-country loans are loans that are made between two countries in the game. In terms of interest payment, they work the same as bank loans. But they are created differently (via the loan diplomatic action), and they also have different effect on default. If a country defaults on an intra-country loan, it does not go bankrupt. The only effect is that the lending country gets a 1-year casus belli on the deadbeat.
How to take a loan
Taking a loan is easy. Select the budget screen, and click the "Take Bank Loan" button. A verification dialog will pop up, showing the loan amount (but unfortunately, not the interest rate). You can OK the loan, or cancel. If you hit OK, the loan amount is immediately added to your treasury, and you can spend it just as any other money.
Effects of a loan
Each loan requires monthly payments of debt service. Interest payments are high priority like military maintenance; they are:
- taken from your monthly income stream before it is spent on anything else
- if monthly income is not enough, any remaining amount is taken from treasury
- if monthly income and treasury are not enough, a forced loan may be taken
- if you cannot even take a forced loan, you suffer bankruptcy.
Each country has a "loansize" variable, by default 200 ducats. This determines the amount of each loan it makes. (A few major powers have scripted events which can increase their loansize, but this is generally not worth doing because major powers generally don't need loans, and having a large loan when you only needed a small one is more costly than necessary.) The number of loans a country can take voluntarily is limited by the size of its economy; every country can take at least 1. A country with a strong economy can take many loans. In addition to one or more voluntary loans, each country can take one forced loan. (This usually leads to bankruptcy.)
Each loan has an interest rate, which unfortunately you cannot see before you get the loan, and hard to know about even then. (You can see your loans, including amount, interest rate, and scheduled repayment date, in the ledger, on page 15.) The interest rate for a new loan is 5% to 10%, depending on how strong your economy is. The interest you pay is quite straightforward:
For example, a 200 ducats loan at 7% requires 14 ducats per year, so you pay 1.16 ducats per month.
Note that you cannot repay loans early, even if you have the money. Thus, the total cost of taking one loan at 7% (which is often the case when players get hit by a random event with a low treasury) is 70 ducats. You should, in general, never take a loan except to pay for the most reliable and high-paying investments (and in money, not just monthly income). The only investment that I take loans for is promoting tax collectors, especially for provinces with high base tax value (4 or more).
After the five year term of a loan is up, you will get a "repayment" dialog. It has a "Pay Loan" button which is active only if you can afford to repay the loan principle with your current treasury. Otherwise, you can only choose "Extend Loan", which re-loans the money for another five years. Unfortunately, the interest rate for loans when you extend them increases by 3% over the rate they had before. Thus loans become vastly more expensive if you extend them; this can often drive you to bankruptcy. Therefore you should strive mightily to avoid extending loans.
There's a trick that is quite useful to know: you can often take a new loan when the repayment dialog is presented. (Set the game to pause whenever you get one.) If you can take a new loan, it will have the normal interest rate. So, you should take a new loan, then immediately use the money to repay the old loan.
Repayment dialogs are instances of limited-time dialogs. If you don't select either option, a repayment dialog will stay up for exactly 2 months, then automatically choose the "extend loan" option and close. Thus, when you get one and you have almost enough money to repay the loan, but not quite, you can sometimes mint for a month or two to get enough and avoid another 5 years of interest.