Fingram 2026-02-10 0
What is the effective interest rate on a loan and what should you know?
What is the effective interest rate on a loan and what should you know?
The effective annual interest rate is a percentage indicator used to calculate the cost of a loan, taking into account all loan service payments made by the client to the credit institution.
The interest rate indicated in advertisements of financial credit institutions reflects only the amount of interest charged, whereas the effective interest rate shows the actual annual cost of the loan.
Example:
A financial credit institution offers a loan at 22% per year.
However, taking into account commissions and other related payments, the actual cost of the loan amounts to 23.5% per year, and this 23.5% represents the effective interest rate.
Why it is important to know the effective interest rate:
• it allows you to properly compare loan offers from different financial credit institutions;
• it helps you be aware of possible additional expenses;
• it shows the full actual cost of the loan.
Recommendations for borrowers:
• always ask about the effective interest rate;
• do not rely only on advertised conditions, but pay attention to the total amount of payments;
• get answers to all questions related to the loan before signing the loan agreement.
Financial credit institutions are required to indicate in the loan agreement both the nominal interest rate and the effective annual interest rate, and also explain the effective annual interest rate to the borrower before issuing the loan.
Do not forget: the lower the effective interest rate, the more beneficial the loan is.
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