Taking a loan is a real challenge. Deciding which loan is best for us is a decision for a few years, so you should consider each pros and cons. The easiest way, of course, is to compare offers from different banks that offer different interest rates.
The APRC is the ideal way to compare a bank’s offers and capabilities, more commonly known as ‘the actual annual interest rate’. The term “low” or “favorable” is not enough, especially if we want to take a loan for several years. That is why a special formula was created, which gives us a specific number that is easy to compare. The formula is complicated, which is why the bank is required to calculate and notify us of a given APRC.
APRC – what is this?
They are often referred to as “low” or “beneficial”, rarely explaining its exact meaning and reason for being. Although we read about it in leaflets, usually in small print, it is worth paying more attention to it. Very often, the APRC differs from the so-called interest rates. It comes from the fact that its final number includes: loan interest plus interest costs. Let us pay attention to this when we consider a given bank service, because it is easy to overlook it in the small footer of the read leaflet.
This means that it includes all other, often hidden costs of the loan, which may include:
- loan interest rate
- charges for additional services not included previously
- the value of money, which most often causes complications in calculations
What’s more interesting – not always lower APRC means cheaper credit. The repayment installments must also be included in the calculation of the APRC’s installments and profitability. The schedule can have a real impact on the final receipt and degree of profitability of the loan.
To understand this exactly, let’s look at it based on an example. We take out a loan of USD 100,000 for a period of 10 years. To make it easier for us to demonstrate it, let’s assume an interest rate of 10% per annum. We ignore all other often hidden costs. In the case of a schedule with decreasing installments (i.e. we pay a larger part first, gradually reducing it) we will pay a total of USD 150,000. In the case of fixed installments (equal monthly), the amount increases to USD 158 thousand.
So what to look at when we compare loans with each other?
Contrary to what most borrowers think – we advise you not to look at nominal interest because it is not reliable and does not show all hidden costs. Instead, pay attention to:
- installments – i.e. the burden resulting from the commitment
- on the APRC
- at the total cost of the loan – which every bank will give us in response to our inquiry. In this category we include: commissions, interest and any additional fees necessary to complete the payment
Online calculators are currently available to help us calculate the APRC. To get the exact number, we need to know: the amount of credit we want to obtain, the loan period (or the number of installments), nominal interest rate (and therefore most often and preferably by banks), commission for granting a new loan, other costs of the loan (it is best to get information from the bank), installment type (i.e. equal and decreasing installments, which we mentioned above).
For example, a loan for USD 15,000, credited for 12 months, with an interest rate of 4%, without hidden costs and with equal installments, for example, APY will give us over 13% at BGŻ Paribas Bank and over 12% at CITI Handlowy. Calculators of this type are therefore intended to facilitate our decision in choosing a bank, and allow us to carefully analyze additional fees or the final amount to be repaid. In this case, we get clear information that the total repayment amount ultimately exceeds USD 20,000. Calculators also often provide the amount of the installment needed (in this case, an equal installment).
APRC formula – how to calculate this indicator?
Calculating the APRC from the formula is extremely complicated and requires a lot of time. Providing the formula is not quite right, because calculating it yourself is extremely rare (mainly due to its complexity and complicated actions). The bank will do it for us. The obligation to inform lies on his side when the loan does not exceed the amount of USD 255 500. If, for some reason, you do not receive such information – remember to ask for it! You have the full right to expect this information. Interestingly, for over 6 years, the APRC formula has been approved and standardized throughout the European Union. This means that in exactly the same way we will calculate the APRC for USD and for another currency.
It is worth noting that the APRC shows the annual rate, so pay attention to compare it with other annual interest rates. So the number of installments is important, not necessarily the number of years we decide to take out a loan. The APRC and the 10-year loan period may differ significantly. It’s easy to make a mistake, because a lower APRC for a shorter period of time does not necessarily mean lower, total costs in a given currency. So we suggest analyzing the total cost of credit.
So what to look at when we want to compare bank offers with a specific loan?
Certainly not at the minimum interest rate, which often hides additional costs. It is best to suggest the number of installments (and their repayment schedule), because it will outline our current burden, as well as the APRC indicator and the total cost of the loan.
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