How do you choose the best loan offer when you are pushing every kind of loan offer from all over the earth to the sky? The first one offers a glow of speed, the second promises a no-interest loan and the third statement that there will be no additional cost to the loan.
So what are the loans worth paying attention to? Interest rate? Or, after all, the extra cost? Or the famous APR?
In this guide, we’ll tell you more about all the costs that a loan can include, and what to look out for when applying for a loan.
When it comes to the cost of a loan, many people first think about the nominal interest rate of a loan. This rate is used, inter alia, in loan agreements to express the interest rate of the loan. Nominal interest rate is the basic rate that expresses the amount of interest payable on a loan.
The nominal rate includes the marginal rate and the reference rate. The marginal interest rate is the rate at which the lender collects its profits. The reference rate controls the interest rate of the loans. Well-known reference rates include Euribor and Prime rates. The nominal interest rate does not take into account, for example, a decline in purchasing power due to inflation.
However, the nominal interest rate does not reflect the total cost of the loan, as there are many other fees associated with the loan, such as the following set-up cost and account management fee.
Fee for setting up a loan account
Start-up Fee, Arrangement Fee, Withdrawal Fee… Despite the variety of terms, the meaning of all of these different headings is practically the same: the cost of taking out a loan. In addition to the different names, there are also differences in opening fees.
The name of the loan account setup fee often depends on whether it is a one-time or flexible loan.
A one-time loan is a one-time loan amount that is repaid in equal installments. The loan opening fee is usually charged on the first installments of the loan. One-time loans in Finland, for example, are provided by Lainaamo.
In a flexible loan, the loan provider grants the borrower a credit line. The loan can be made available to the extent allowed by the credit line at any time. For example, if you take half your $ 5,000 credit now, $ 2,500 remains to be used later. Repayment of the loan will release the loan for drawdown.
Flex loans are not usually charged for a start-up fee as they are a one-time loan. Instead, each time you raise a loan, you will be charged a withdrawal fee. The withdrawal fee may be a fixed amount in euro or a percentage of the amount withdrawn. For example, Good Finance Bank provides flexible credit.
Fees for setting up consumer loans can vary greatly. Therefore, it is very important for the consumer to pay attention to how much a mere opening a loan account can already cost.
Account management fee
In addition to the set-up fee, most loans also have an account management fee. As long as the loan is paid off, you will have to pay an account management fee on the loan account. Account management fees can often seem negligible, but especially with smaller loans, account management fees can become an unreasonable expense relative to other loan costs.
An example is a monthly maintenance fee of EUR 5, which increases the cost of the loan by EUR 60 per year.
The annual percentage rate
The APR is an excellent measure of loan comparisons because it is specifically designed to expose the various additional costs of a loan. The annual percentage rate will therefore reflect the cost of processing the loan, the advertising costs to pay for the loan and the various opening and service charges. Indeed, our loan comparison always indicates the current annual interest rate of the loans.
Legislation has sought to curb, for example, the interest rates on instant loans. By law, for loans of less than EUR 2,000, the effective annual interest rate should not exceed 50% plus the reference rate. In practice, the law is constantly being circumvented, including through the use of the enhanced flexibility credits and limits.
Total cost vs. current APR
Thus, the real APR does not always work in the best possible way. In addition, it does not help the consumer to understand how much the loan will ultimately cost, as it may be challenging to report it to the loan.
For these reasons, among other things, it is often better to focus on the real total cost. The current total cost of the loan will clearly tell the consumer how much the loan will pay in full. Comparing the total cost of a loan is the easiest way to find out which loan is the most affordable.
Many people find the total cost of a loan easier than the current annual interest rate, because the total cost is always finally the issue. Who wouldn’t want to know from the outset exactly how much their loan will eventually pay off.