What makes up the cost of the loan?
The price of money borrowed is one of the most important, if not the most important criteria for choosing a loan. If the bank offers were compiled solely by interest rate, life would be much easier. Nevertheless, to make the right choice you need to consider some other important elements of the loan.
When banks advertise their loans, they mainly display the so-called nominal interest rate. On its basis, interest is calculated, in other words remuneration for borrowed money. Interest is a basic component of the total cost of obtaining a loan, but it is generally not the only one. We are informed by the bank in advertisements about the remaining costs, as well as about the actual annual interest rate, but usually at the bottom of the screen and in lower case. Banks are required to provide all the costs that await us, as these are the requirements of the Consumer Credit Act – based on the so-called representative example, i.e. simply a typical example of the contract being concluded.
Commissions, fees, insurance, i.e. additional costs
Unlike interest, commissions and fees are directly linked to specific activities that the bank performs. Considering cash and mortgage loans, we usually come across a commission charged at the beginning of the contract, as well as a preparation fee. The bank calculates the commission based on the amount of credit granted, and the rate may depend on several different factors, such as the borrower’s creditworthiness. In many situations, banks encourage their clients to take advantage of insurance, whose task is to ensure the repayment of installments in the event of unforeseen random events (e.g. loss of employment or hospital stay). Persons paying the insurance premium may also count on lower interest rates, but they are obliged to cover the costs of protection.
Repayment conditions and total cost of the loan
The bank where we want to take a loan usually presents us with a statement in which it shows us the total cost of the loan. Thanks to this, we will be able to see a separate sum for insurance (if we decide to do it, or it is required by the bank), as well as the sum of commission and interest. In addition, the bank will inform us in advance about the amount of installments, as well as how they will be repaid.
The most important element is the total cost of the loan. It contains a summary of all the above items. This value corresponds to the “gross price” of borrowed money and it can be the basis for comparisons if we want to check whether another financial institution has a better offer.
It is worth remembering that factors such as the repayment method have an impact on the total cost of the loan. If we choose equal installments, the sum of interest paid will be higher than when our choice falls on decreasing installments. This is due to the fact that installments decreasing from the beginning force us to pay back more capital, which means that our debt to the bank will be reduced faster.