Interest rate on the loan

May 25, 2019 Finance

Interest rate on the loan

Are you thinking about taking out a loan from a bank? In order to choose the right offer for you, you need to be aware of the costs involved in this way of raising money. Banks are not charitable institutions, and lending brings them concrete profits. Banks impose numerous fees on borrowers – commissions, preparatory fees and interest. The latter have the greatest impact on the total cost of the loan and the amount of the monthly instalment. Their amount results directly from the interest rate of the loan. These, in turn, are determined by the bank on the basis of interest rates and the pawnshop rate. The loan interest rate can be both fixed and variable. Before we take a loan, it is worth knowing what kind of interest rate is the most advantageous and which loan offer is the most advantageous for us. In this article you will read about credits and their interest rates.
On what terms do banks grant loans?
Banks in the USA are under constant control of the Polish Financial Supervision Authority. It is an institution that ensures the proper functioning of the financial market in the United States. KNF often issues recommendations containing prudential norms for banks, which have to comply with them. The lending activity of banks is also strictly defined in the provisions of the Banking Law Act. Therefore, if banks place high demands on their potential borrowers, it results not only from taking care to protect their interests, but also from the restrictions imposed on banks by the law and institutions guarding the financial market.
Credit and its costs
In order to earn money on loans, banks have to charge different costs for them. They therefore impose a commission on borrowers for granting credit. They often charge a preparatory fee. It also happens that the additional cost of a loan is its insurance. Then the insurance premium is an element of the monthly instalment. However, the most important component of a bank’s earnings on a loan is interest. We pay them directly in the credit installment. We pay interest to the bank for the possibility of using the money borrowed from us. The amount of interest depends on the interest rate.
Credit interest rate
The interest rate on the loan is given by banks on an annual basis. Its amount may not exceed four times the pawnshop rate, which is determined by the office. The interest rate can be fixed and variable. In the first case, the interest rate is identical for the entire duration of the credit agreement. The repayment schedule is also fixed. In the case of a variable interest rate, its size depends on several factors. Floating interest rate consists of two elements. The first element that is not subject to change is the margin. The second element is the interest that changes. Their size depends on the reference point, which is usually WIBOR, i.e. the interest rate applicable on the interbank market.
Fixed interest rates are most often used in the case of short-term loans. On the other hand, variable interest rates are used for long-term loans. Variable interest rates seem to be a much more advantageous solution for borrowers. Especially now, when the Monetary Policy Council lowers interest rates. If interest rates are lowered, the interest rate on the loan also decreases.
Loan instalment
Interest, which is a direct reflection of the interest rate on the loan, is paid in monthly instalments. Credit installments may be equal or decreasing. What is the distinction? Equal installments have a fixed amount throughout the loan period. The installment consists of a capital and interest part. In the initial phase of loan repayment, the interest part is bigger than the capital part. Then the proportions are reversed, but this does not translate into the amount of the instalment. This one is unchangeable.
The credit instalment may also be decreasing. Then its amount with the lapse of the credit period is lower and lower. This is because interest is calculated on the outstanding principal. And as it is getting smaller, the monthly installment will also be smaller. There is no denying that decreasing instalments are much more advantageous for borrowers.
APR and interest rate
However, the interest rate is not a measurable parameter for determining the loan costs. In order to estimate how much it will actually cost us to take out a loan, it is better to look at the Real Annual Interest Rate. The APR includes not only the nominal interest rate, but also all other charges accompanying the loan – commissions, dreams or preparatory fees. In addition, it should also be mentioned that the APRC is calculated identically by all banks. A uniform calculation method makes it an excellent tool for comparing credit offers.