When a borrower takes a loan from a bank, he is given a copy of the agreement, which contains all the data, including the interest rate on the loan and its full cost. These rates are always different.
What is interest rate
When issuing a loan, the bank informs the client about the amount of the interest rate for using the loan. Often, trying to attract customers, credit organizations declare an attractive interest rate for using a loan, but not all borrowers pay attention to additional fees and payments in favor of the bank, which significantly increase its value. At the same time, lending institutions receive their financial benefits from these fees.
According to the adopted Directive of the Central Bank of Russia No. 2008-U, banks are obliged to indicate in the agreement the full cost of the loan, including payments in their favor, made by the borrower once. This document states that when calculating the full cost of a loan, a credit institution is obliged to inform the borrower about all types of payments that he will have to pay in its favor, including the calculation of the following operations:
- repayment of the loan principal;
- repayment of interest for the use of the loan;
- payment of the amount of the commission for the execution of the contract;
- payment of commission for granting a loan;
- commissions for opening an account and maintaining it;
- commissions for settlement and cash services, for servicing a credit card.
Also, the full cost of the loan includes mandatory payments to insurance companies, payment for the services of notaries and lawyers in the preparation of various necessary documents for pledging property transferred as collateral for the loan.
The total cost of the loan does not include MTPL insurance payments, commissions for obtaining and repaying a loan in cash, including payment through ATMs (sometimes these percentages can reach 3-5% of the total amount). The possible payment of a fine for a late payment on a loan, for blocking a card, withholding a commission for crediting funds to a credit card by third-party credit organizations, etc. is also not taken into account.
Effective interest rate and loss of profits
All of these payments significantly increase the cost of the loan for the borrower. However, in the face of tough competition in the lending market, trying to attract customers, banks in most cases refuse to charge most of the commissions, but even in this case, the cost of the loan will be higher than stated in the agreement. This is due to the fact that there is a concept of effective interest rate and compound interest. In this case, in calculating the total cost of the loan, the amount of the borrower's lost profit is taken, which he could have obtained from his finances if he had not paid interest on the loan with them, but put it on a deposit at interest.
To find out the full amount of the loan cost, the borrower, before signing the agreement, must carefully read the document under which he will sign.
