What does the cost of the loan consist of?
The cost of credit is the most important indicator that allows you to assess whether a given bank’s offer is attractive to us. The total cost consists of many factors that should be considered. The common mistake of many people is to equate the cost of credit with nominal interest. It should be remembered, however, that interest is only part of the total amount that we will pay back. Check what exactly makes up the cost of the cash loan.
Let’s start with the fact that costs can be divided into two groups: interest and non-interest. The first of them result directly from nominal interest and are the bank’s profit on the loan granted. In turn, non-interest costs are all fees that are not included in the interest rate. These are all commissions, insurance and administrative fees. In order to reliably assess the quality of a given banking offer, we should remember about several important factors. What should we pay attention to when calculating loan costs?
Nominal interest rate, i.e. credit interest
Both banks and loan companies often tempt their clients with very low interest rates on loans. A lower interest rate means that we will pay less interest on the amount borrowed. Unfortunately, this is only one of the factors determining the total costs. There is no shortage of offers in which lower nominal interest is effectively “made up for” by non-interest costs. It should be remembered that after signing the contract you do not expose yourself to an unpleasant surprise and too high a monthly installment to pay. For customers, the nominal interest rate is not that important in the context of total costs. For the bank, however, it is a convenient form of advertising.
Non-interest cash loan costs
The cash loan award procedure requires the bank to take appropriate action. These are usually paid and require some administrative costs from the very beginning. In addition, many banks want to count on some profit at the very beginning of the financing period. Hence, a commission of several percent on the amount awarded to us. With a large loan, the bank will also want to protect itself in the event of a change in the customer’s financial situation. Insurance may therefore be obligatory, which will additionally affect the total cost of the loan.
The above fees are so-called non-interest costs that the nominal interest does not inform us about. As a result, an attractive-looking loan offer in practice may turn out to be much less profitable due to non-interest costs.
What does the APRC tell us about?
How can we avoid unpleasant surprises related to the high total cost of credit? Instead of nominal interest rate, let’s take the APRC indicator, i.e. the actual annual interest rate, to heart. This indicator informs us about the sum of interest and non-interest costs. By multiplying the APRC interest rate in the form of a numerical fraction by the loan amount, we get the total cost that we will pay back.
If you plan to take a large loan and do not have extensive knowledge of finance, it is always worth consulting with an advisor. The costs of such advice are not high, but we will get knowledge on what to look for when determining the terms of the loan. The bank will provide us with a full simulation showing the total cost of financing. A bit of knowledge is enough to know the details of the offer and assess their attractiveness.
What can affect the higher cost of credit in the future?
Unfortunately, the vast majority of bank offers include variable interest rates, which may change in the future. Usually to the detriment of the customer. What can affect the higher cost of the loan already during its repayment? First of all, an increase in interest rates, which is a response to the growing problem of inflation and a sharp decline in the value of the currency. Before increasing the installment, you can protect yourself with additional insurance or by choosing a fixed interest rate. Unfortunately, it is still available only on some bank offers.