[div_1]
What is mortgage loan interest rate?: The interest rate plays an essential role when you want to get a loan. Depending on it, you can determine in advance whether it is worth signing a contract or not. By knowing all the necessary details from the beginning, you can avoid possible problems. In this guide, we present everything about:
- What are bank interest rates
- What types of interest are there
- Annual effective interest (APR) – what it is and why it is important
- Factors that influence the amount of interest
- How you calculate interest
What are bank interest rates?
The interest represents the price of the borrowed money and has the role of covering the risks that the creditor (the one who offers the money) assumes, as well as the fact that he cannot use the money while he lent it to another person.
Thus, you can be in two scenarios: either you receive interest when you are the one who provides the money, or you pay the interest when you take a loan. Concretely, when you think of keeping your savings in a bank deposit, for example, it is like lending your money to a financial institution. Based on a contract concluded with the bank and some legal regulations in the field, you leave the money in the care of the bank for a period. For the benefit of this deposit, the bank offers an additional amount to your account. Thus, in addition to the amount you deposited, you will also have an additional profit from the interest. Instead, when the bank lends you the money, you will be the one paying the interest on the loan.
What types of interest are there?
If you want to take out a loan, there can be two types of interest:
- The fixed interest rate – is established upon signing the credit agreement and cannot be changed throughout the financing period;
- Variable interest – is composed of the bank’s margin and benchmarks. These indexes are: IRCC (Reference Index for Consumer Credits) is applied for all loans in LEI, ROBOR (Romanian Interbank Offered Rate) only for real estate loans Noua Casă, EURIBOR (European Interbank Offered Rate) for loans in Euro or LIBOR is used mainly for loans in USD and CHF.
You will also find interest classified into simple interest vs. compound interest.
Simple interest
As a rule, it applies to loans that do not exceed one year. It is calculated according to the interest rate set by the bank and the total value of the loan. Simple interest is pretty easy to understand. Basically, if you have a loan of 1000 RON, with an interest rate of 2% per month, the interest will be 2% of 1000 RON, that is 20 RON per month. Calculated for the whole year, the total interest will be 240 lei.
Compound interest
In addition to APR and simple interest, you will also come across the notion of compound interest or “interest on interest”, but this applies when you lend to the bank – in the case of investments, capitalized deposits. For example, if you open an investment account, in the first year, simple interest will apply and you will get “x amount” in addition. In the second year, you will receive both the interest applied to the amount originally invested (simple interest) and an interest applied to “amount x”, obtained from the first year’s interest. Thus, the compound interest is obtained.
Annual Effective Interest (APR) – what it is and why it matters
[div_2]
According to GEO 50/2013, the annual effective interest (APR) represents the total cost of the credit for the consumer. It is expressed as an annual percentage of the total value of the loan and includes the related fees: administration fees, file analysis fees, processing fee, file closing fees, withdrawal or balance inquiry fee. Basically, the APR is the total cost of the contract per year. It is important to know that the APR also takes into account the inflation rate. That’s why, when you want to take out a loan, it’s very important to track what the effective annual interest rate is. There may be the possibility that a loan that, initially, starts with an acceptable interest rate, will end up with additional costs over the years.
Factors that influence the amount of interest
We previously said that the variable interest rate can change during the contract period, depending on different criteria. They are called monetary indicators and are divided into:
- EURIBOR (European Interbank Offered Rate) – applies to loans granted in EURO;
- LIBOR – applies to loans granted in pounds;
- IRCC – is granted for loans granted in the national currency and is calculated exclusively on the basis of interbank transactions carried out in a certain period.
How do you calculate interest?
Like most people, before taking a particular loan, you prefer to compare its price with other offers on the market. To make it easier for you, it is best to talk to a broker who can present you with several offers that suit your needs.
How do you calculate simple interest?
To calculate simple interest, the following formula is used:
Simple Interest = Principal x Interest Rate x Time.
Suppose you borrow 5,000 usd, for a period of one year and with an annual interest rate of 8%. This means that, at the end of the first year, 5,000 * 8% * 1, that is, the simple interest paid will be 400 lei.
How do you calculate compound interest?
As we mentioned before, compound interest is interest applied to interest. Basically, if you have an investment account of 10,000 RON, with an interest rate of 3% annually, at the end of the first year, you will receive 3% of 10,000 RON, i.e. 300 RON in interest. If you keep this money in the account, next year you will receive 300 RON, plus 3% of 300 RON (another 9 RON), i.e. a compound interest of 309 RON. As a rule, this type of interest applies to loans longer than one year and is profitable in the long term.
How do you calculate the effective annual interest rate?
[div_3]
Unlike simple and compound interest, which you can calculate yourself, the effective annual interest is calculated by the financial institution that offers the loan or credit. According to the legislation in force, whether we are talking about the bank or the credit brokers, they have the obligation to mention the APR value both in the advertising offers (leaflet, announcement, advertisement) and in the concluded contract.
Therefore, any loan involves a cost related to the use of that money. Whether you are the one granting the interest or the beneficiary, it is important to be informed and follow all the details before signing a credit agreement. If things are not clear to you, you can turn to the recommendations of specialists. Credit brokers can help you make the right choices for you in the long term