The cost of a loan is not just a nominal interest rate. Back on all the elements which lengthen the amount to pay for the borrower.
An interest rate in a loan offer is also called the nominal rate. This is the indicator that determines the remuneration that the lender receives from the capital. But then, why do people who pay off a monthly payment find that the cost of their credit exceeds the calculation of bank interest? Very simply, the nominal rate is not the only indicator taken into account to correctly assess the cost of a loan.
What does a borrower pay after making a loan at a bank?
Funding for this often includes coverage defined by the insurance rate. It is used to guarantee the reimbursement of monthly payments when the borrower is faced with a situation provided for by the terms of the contract. The borrower insurance then takes over and the monthly payments are covered during a period of disability or are fully reimbursed in the event of death. Each month, it represents from a few dollars, for small loans, to several tens or even hundreds of dollars for home loans in particular.
Often, to compensate for the time devoted to putting together a dossier and analyzing the feasibility of a project, such as the acquisition of a new vehicle or the purchase of housing, banks charge folder. Included between one hundred and more than a thousand dollars, they are also absorbed in the overall cost of a loan and reimbursed over the duration of the contract.
Depending on the specifics of the financing, a borrower may have to pay other costs. For example, during a repurchase of mortgage, which is neither more nor less than the establishment of a new credit, it happens that mortgage costs are added to the repayment of maturities.
What is the APR in a credit offer?
There is an indicator that summarizes the overall cost of a loan and which must be included in the schedule. Referred to as the overall annual effective rate (APR), it must be the subject of special attention. For identical capital, this rate is the best way to compare the cost of offers made by banking establishments. To know that each of the elements that compose it is potentially negotiable. Loan seekers can thus play the negotiation card to reduce the amount of their loans and bring competition into play.
Finally, applicants tend to focus their attention on getting the lowest nominal rate during negotiations, at the expense of the rate on their loan insurance. However, the cost of coverage can sometimes be close to or even exceed the sum of interest during periods of low interest rates. If the bank’s offer is therefore not attractive enough, the ideal is to delegate the insurance contract to a competitor before the financing is put in place.