The effective interest rate is the amount that enables the lender to determine the income to be received from the provision of cash at interest. It represents the total cost of the loan, i.e. overpayment that is carried out by the borrower for the entire crediting period.
Instructions
Step 1
It should be borne in mind that the interest rate specified in the loan agreement is not all the costs borne by the borrower on the loan. Therefore, the effective interest rate is designed to inform the potential client about the possible costs associated with servicing the debt.
Step 2
The calculation of the effective interest rate necessarily includes payments for the repayment of the principal debt, interest for the use of funds, commission for the consideration of a loan application, for opening and maintaining a loan account, for early repayment of the principal debt, as well as the amount of compulsory insurance of pledged property or life and health the borrower, if provided for by the loan agreement.
Step 3
The effective interest rate also depends on the method of repayment of the loan (annuity or differentiated payments), the frequency of repayment of the principal debt (monthly, quarterly or at the end of the loan maturity), the frequency of the commission charge (one-time or monthly).
Step 4
When consulting a client about a loan, a bank employee is obliged to provide information on calculating the effective interest rate. It can be independently determined using the Loan Calculator program, where the parameters of the credit transaction are entered in the required fields.
Step 5
If it is not possible to use this program, then the effective interest rate can be calculated independently. This calculation will be less accurate, but it will allow you to establish the difference between the declared interest rate and the real one.
Step 6
To do this, you need to multiply the monthly loan payment, taking into account interest, by the loan term in months. The result is the amount that the borrower is obliged to pay during the loan term. To it you need to add all the available commissions and insurance amounts. And then from the result obtained, the amount of the requested loan should be subtracted. The result will be an overpayment for the entire loan term. If it is divided by the amount of the requested loan and multiplied by 100, then the desired value will be obtained - the effective interest rate.
