Nominal interest rate vs. APRC and total cost of credit

When deciding whether to take a bank loan or an Internet loan, it is definitely worth looking at the total costs of such a commitment.

In the past, advertising materials mainly displayed information on nominal interest rates, but currently, the applicable regulations regulate the issue of presenting offers, which is why the APRC comes to the fore. How do they differ from each other?

What is the nominal interest rate and APRC

The nominal interest rate of the loan relates to the interest costs of the capital borrowed, while the total cost of the liability also depends on other factors. Therefore, when searching for the most advantageous offer on the market, it will be wiser to use the APRC indicator, i.e. the Annual Annual Interest Rate.

It is used to determine the total cost of a loan or percentage, i.e. not only the nominal interest rate but also all additional non-interest charges, which include, among others commission charged by the lender or additional compulsory insurance. The APRC allows you to determine in a more reliable way whether a particular offer is beneficial.

Transparent rules

Pursuant to the applicable provisions contained in the Consumer Credit Act, banks and other institutions granting loans are obliged to present their offer in a reliable manner along with a representative example. Before introducing changes to the provisions of advertising loans, loans focused the attention of consumers primarily on a lower nominal interest rate than the APRC, hence this type of financial products often, in reality, proved to be much more expensive than advertising could have suggested.

At present, however, institutions granting loans or borrowings in accordance with the law indicated in the promotional materials the total cost of the liability incurred. Although formulas are available on the Internet to calculate the Real Annual Interest Rate, this can be quite a complicated task for a layman. Special calculators available, among others, are very useful. on loan companies’ websites, such as on Good Finance.

What to look for when taking a loan?

What to look for when taking a loan?

Since nominal and real interest rates are two completely different issues, when comparing individual offers of banks or loan companies, pay attention to the Real Annual Interest Rate. The APRC will indicate how much the entire liability will cost us, including interest on the loan, commission charged for granting it, insurance, as well as other additional costs related to the loan, variable time value of money and period of repayment.

It is worth remembering that the nominal interest rate and APRC may differ significantly, and a comparison of the second indicator will allow a reliable assessment of the profitability of a specific offer and thus make a more informed decision. A good solution is also to compare at least a few interesting offers and familiarize yourself with the terms of the contract in order to make the best choice.

Interest and other expenses

Interest and other expenses

It is good to know that all additional fees not included in the Real Annual Interest Rate are to some extent controlled by applicable law and may not exceed top limits. Pursuant to these principles, interest on liabilities in the form of consumer credit may amount to twice the reference rate of the Fine Bank, which increased by 3.5 percent.

Currently, the maximum interest rate on loans granted by banks and loans offered by other institutions in our country is 10 percent. Non-interest loan costs may not exceed 25 percent of the total loan amount and 30 percent of the variable amount determined depending on the period for which such liabilities were incurred. Of course, regardless of these limits, you should use common sense when taking a loan and compare not only the nominal interest rate, but above all pay attention to the APRC.

About the Author

Leave a Reply

Your email address will not be published. Required fields are marked *