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?
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?
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?
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
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?
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
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 easily, 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.