Comparing loan offers with respect to their interest rate is not appropriate. The borrower incurs many other costs that are charged to his pocket as part of the monthly principal and interest installments and the fees immediately incurred when signing the loan agreement. So let’s find out how to calculate the total cost of a loan?
When calculating the total cost of a bank loan , all fees and commissions borne by the borrower should be included. This can be calculated based on the amount of the liability and the APRC of the loan.
What is meant by the total cost of credit?
The total cost of the loan includes all costs that the borrower will have to bear in connection with the signing of the loan agreement. It is not only interest or commission charged by the bank for granting the commitment. In addition to interest and commissions, the total cost of credit should be added to the pool:
- costs of establishing loan repayment collateral,
- insurance premiums,
- additional costs.
It happens that some additional costs the customer bears only when he decides to take additional insurance or establish collateral. Some of them involve only certain types of loans , e.g. mortgage fees related to the entry of a mortgage in the land and mortgage register for the bank. Credit costs should therefore be divided into voluntary and mandatory costs, which will be necessary if the person wants to get a loan .
How to calculate the total cost of credit?
To calculate the total cost of the loan, it should include credit interest, calculated on the basis of the interest rate provided by the bank, the loan commission, the fee for examining the loan application and any other fees indicated by the bank in the loan agreement and in the table of fees and commissions. A facilitation for the client will be obligatory to put in the loan offers Annual Real Interest Rate of the loan, i.e. APRC. This is actually the total cost of the loan that the customer must bear, but expressed as a percentage of the total loan amount per year.
Information on the total cost of credit should be the starting point when comparing different offers. On this basis, you can clearly choose the offer with the lowest costs charged to the borrower. Interestingly, it will not necessarily mean a loan with the lowest nominal interest rate.