How is the real cost of a loan calculated
October 8, 2018
When people go to a bank to ask for a loan, they only look at the nominal interest rate (TIN), which is usually the interest rate that the bank itself publicizes to make the loan attractive and desirable in the eyes of its clients. customers. However, there are a number of factors that must also be taken into account to calculate the real interest rate that will be paid for the borrowed money, or what is the same, the actual cost of a loan once all the commissions are included and associated expenses.
The real cost of a loan is what is known as the annual equivalent rate (APR) and includes not only the TIN, but also the rest of the expenses related to the loan, such as opening and cancellation fees or linked insurance.
TIN vs TAE to calculate the real cost of a loan
Many times, the difference between a cheap loan and an expensive loan falls on those other expenses. It can even happen that a loan with a very low TIN is actually quite more expensive than another loan with the higher TIN. There are also loans that are offered at a 0% TIN but their real cost is very high.
For example, imagine that you contract a loan of 20,000 euros with a repayment term of eight years. If your interest rate is 5.99% (TIN) but you hide an opening commission of 2% and a formalization fee of 60 euros, then the real cost of the loan, that is, your APR , is 6.81 %.
In this example, you see how the loan is not as cheap as it seemed at first. If instead of 20,000 euros we made calculations for a mortgage of 150,000 euros and included the innumerable commissions that most involved, the difference between TIN and TAE would be even greater.
As you imagine, when comparing loans to select the cheapest one, it is not enough to look at the TIN. It is very important to know what is the APR of each of them. Otherwise, a wrong decision will surely be made. Regardless of the TIN, other things being equal, the one whose TAE is smaller should be chosen.
HOW TO CALCULATE THE APR
In practice, it is very difficult to calculate the APR of a loan. You should do it using an Excel spreadsheet (on the internet there are some very well done) or using an online financial calculator like the one offered on your website by the Bank of Spain.
However, you must know that the Bank of Spain itself requires all financial institutions that operate in Spain to publish both the TIN and the APR of their loans. What happens is that this information can be a bit hidden or in very small print so that it is not easy to find. Therefore, if you are not clear, ask your bank agent. It is in the obligation to inform you.