Non-interest loan costs and their importance

If you are looking for a favorable loan offer, you probably realize how important it is to compare available bank proposals in various financial institutions. Several factors must be combined.

Lots of borrowers only pay attention to the amount of interest, which is a big mistake. Non-interest loan costs are equally important. What are they and what does it consist of?

What are the costs of bank loans?

What are the costs of bank loans?

Regardless of whether you decide on a small-scale cash loan or sign a mortgage contract with the bank, you should always pay attention to the total cost of the loan. What you need to look at:

  • interest is the basic component of your loan. Banks provide the interest rate on the loan on an annual basis. Importantly, each of them sets them individually, but their value cannot exceed four times the pawnshop rate,
  • additional costs – these types of costs are determined by each bank at its own discretion, including a commission for granting a loan or even a preparatory fee.
  • insurance – it is rarely mandatory, it is a form of bank security, which may be necessary, e.g. if your own down payment is too low when you apply for a mortgage.

What are non-interest loan costs?

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As the name implies, non-interest costs are all additional fees that the bank requests from the borrower, except for the interest rate set. Interest consists of a bank margin and a base rate for cash loans, which is determined by the market.

So what exactly are non-interest loan costs? They can consist of many elements, therefore they will not be identical in every bank.

Non-interest loan costs include commissions, account maintenance fees, preparation fees, credit insurance or cross-selling costs. Most of these types of fees are usually found in the mortgage loan offer.

What factors affect the amount of non-interest loan costs?

What factors affect the amount of non-interest loan costs?

You already know that the cost of credit is divided into interest and non-interest parts. The former is the result of the nominal interest rate, while the latter depends on the amount of preparation fees charged by the bank.

To a large extent, the amount of non-interest loan costs is affected by a positive credit history and good creditworthiness. So these are factors dependent on the borrower.

The better your financial situation looks, the lower additional costs you will have to bear . A significant part of this type of costs constitutes collateral for the bank.

Act regulating non-interest loan costs

Act regulating non-interest loan costs

Non-interest loan costs are regulated by law. Until 2011, such costs could not exceed 5% of the liability. Later, however, this changed, so that financial institutions could independently determine their amount and had complete freedom. This was probably not good information for borrowers.

The introduction of non-interest loan costs in this form of the act caused many banks to commit fraud, as borrowers were burdened with an excessive amount of additional costs. However, this changed in March 2016, as the act came into force, which introduced the maximum ceiling for non-interest costs .

It guarantees borrowers that the additional costs do not increase the total loan costs by an incredible amount. What are the maximum non-interest loan costs now? It is worth knowing that they cannot exceed 25% of the borrowed amount . Moreover, they may not be more than 30% of the amount on an annual basis.

How to calculate non-interest loan costs?

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The maximum amount of non-interest loan costs is expressed by the formula:

MPKK ≤ (? × 25%) + (K × d / R × 30%)

How to read individual symbols?

  • MPKK – this is the maximum amount of non-interest loan costs
  • K – total loan amount
  • d – repayment period (expressed in days)
  • R – number of days in the year

Let’s check the example of how to calculate non-interest loan costs. Suppose you want to borrow USD 1,500 for a period of 30 days. We calculate the maximum non-interest cost based on the formula:

(USD 1,500 x 0.25%) + (USD 1,500 x 30/365 x 30%)

375 + 36.98 = 411 USD *

* rounded amounts

This means, therefore, that for a cash loan of USD 1,500 for a period of 30 days, the maximum non-interest costs may be about USD 411.

Annual interest rate and non-interest loan costs

Annual interest rate and non-interest loan costs

Since you already know that the amount of interest does not constitute the total cost of the financial commitment, you must also look at other numbers. Where do you look for them? You don’t have to make calculations yourself, all you need to do is pay attention to the APRC or the actual annual loan rate.

It includes all loan costs, including additional costs. However, do not confuse it with RSO, i.e. the annual interest rate. RSO does not take into account non-interest loan costs. Probably because banks most often mention the RSO and not the APRC.

However, you will certainly find both these values ‚Äč‚Äčeasily, even if they are given in small print. Every time you are tempted by a loan offer, look carefully at all loan costs.

Just because the interest rate seems attractive does not mean that you will pay off a small amount. The vast majority of banks charge additional costs, which is why they are difficult to avoid.

Denominated loan – what is it about?

A denominated loan is the most common type of mortgage loan converted into foreign currency. In the loan agreement, its amount is expressed in the currency of the loan, for example in Swiss francs. However, the loan is paid to the borrower in USD at the exchange rate as of the date of launch. When deciding on a denominated loan, we do not really know what amount of USD the bank will pay us. It may be lower or higher than the one we requested.

Among the various types of loans available in banks, an important place in the loan offer is occupied by a mortgage. It is usually taken for the implementation of broadly understood housing goals.

The mortgage calculator is able to tell clients how much such liability will cost and what principal and interest installments the customer will pay during the loan period. The type of mortgage is a denominated loan. Let’s check what it actually consists of.

What is a denominated loan?

What is a denominated loan?

In bank offers, a denominated loan is nothing new. It has been around for years, but many bank customers are unable to answer the question of what it is. How can you explain the term “denominated loan”?

The definition indicates that in this case, we are dealing with a foreign currency loan, in which the amount of debt in a given foreign currency is calculated according to the currency buying rate that is in force on the day the loan agreement is signed with the borrower. At the same time, regardless of the currency in which the loan is denominated, installments are always repaid in USD.

Exchange rates are constantly changing, therefore loans denominated are risky. There is a real risk in their case that the amount of the loan paid out in national currency will prove insufficient, e.g. for the purchase of a specific property. The reverse situation may also occur – that the exchange rate will increase from the moment the loan agreement is signed, and as a result, the borrower will receive more funds in the national currency.

The specificity of a denominated loan is easier to understand if we look at an example. We assume that a loan of USD 100,000 denominated in USD is granted, and on the day of signing the loan agreement the purchase rate of the dollar by the bank is USD 4.20 / USD, while the selling rate is USD 4.30 / USD. The loan amount mentioned in the contract is 23,809.52 dollars (at the purchase rate), and the installment is around 238 dollars.

The installment on the day of launch is USD 1023.40 (at the selling rate), and the repayment of the entire liability on that day is USD 102,440. If the loan amount is USD 100,000, after denomination USD 23,809.52, and the loan is paid out in tranches, it may happen that these differences in the amount of funds paid will be more pronounced due to fluctuations in the exchange rate over a longer period of time.

If the dollar appreciates against the dollar, the tranche of the denominated loan paid in dollars may not be sufficient for the needs presented by the borrower.

Advantages and disadvantages of a denominated loan

Advantages and disadvantages of a denominated loan

A loan is risky and this risk level is its biggest drawback. You can say it’s a currency loan only for the brave. Exchange rates change unpredictably and dynamically, actually from day today. They affect the amount of the denominated loan.

As a result, it may happen that the amount paid out is too small to cover the costs related to the investment planned by the borrower. Customers who take out a denominated loan paid in tranches take an even greater risk. Spreading the loan disbursement over a few months increases the exchange rate risk – the differences between subsequent tranche disbursements can be very high.

Despite the existing risk, a denominated loan also has advantages. It may have a better interest rate than a regular loan in USD, and at the same time, the borrower may obtain a larger loan amount than in USD and a chance to pay off the debt faster.

Loan denominated in francs

If the bank grants a loan denominated in Swiss francs, its amount in USD is converted into CHF at the exchange rate on the day the loan agreement is prepared. The conversion takes place at the franc buying rate applicable on that day at the bank.

A loan denominated in CHF, which is paid out later, after signing the loan agreement, may have a higher or lower amount than the one indicated on the agreement.

Loan denominated in dollar

As in the case of a loan denominated in Swiss francs, the loan denominated in dollars is granted in such a way that its amount in dollars is converted into dollars at the exchange rate on the date of the loan agreement, but the loan is already disbursed at the exchange rate applicable on the day of withdrawal.

Denominated loan paid out in tranches

The payment of a loan denominated in tranches increases the risk of loss for the borrower. All because the disbursement of funds from the loan takes place gradually, for example, as the house is being built or the apartment is being renovated – this is the case when mortgage and construction loans are granted.

In the case of a loan denominated in tranches when signing a loan agreement, it is known in advance how much currency is available, but it is only at the last tranche that the customer finds out how much he actually borrowed in USD from the bank.

Generally, the longer the period between the moment of determining the amount of the loan in currency and the time of its final payment in USD, the greater the probability that the USD equivalent may be completely different than expected by the customer.

What is the difference between denominated and indexed credit?

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We already know what a denominated loan is, but how is it different from an indexed loan? Are loans denominated and indexed the same loans? Although there are similarities between them, it cannot be said that they are the same.

An indexed loan is another type of foreign currency loan that is converted from USD to foreign currency at the time of its launch, i.e. the payment of money to the borrower. At the stage of concluding the contract in a denominated loan, the customer immediately knows the amount of debt in a foreign currency, and the indexed loan only contains information about the amount of dollars to be repaid.

An indexed loan will guarantee the customer, e.g. purchase of the real estate, but part of the money may be paid to him at an unfavorable rate. With this type of loan, a lower exchange rate will not result in a smaller amount of money being paid out, but the customer will have less money in the currency to pay.