As with any type of financial commitment, whether it is a loan or a loan, so the debt consolidation costs. Banks offering this product to us must earn on their clients to make it profitable. Therefore, by proposing to use a combination of various financial obligations into one loan, they pay the costs of the entire undertaking in order to make it still attractive at attractive prices. What to pay attention to, and how not to get carried away by interest?
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While reading loan offers, we have probably met with the terms Annual Interest Rate (APR) or fixed or nominal interest rate. Some values are higher than others, but banks advertise the service as very cheap and profitable. How to get it?
Annual Actual Interest Rate that is, the popular APY is the most important indicator that reflects the total costs borne by the consumer by taking a loan at a given banking institution. Under the term “total” there is a preparation fee, commission, additional costs, and interest. In addition, APY is a parameter that takes into account price volatility. It is, therefore, the most reliable and the same telling us the most about the loan itself interest rate. Fortunately, thanks to the Internet tools available to us, we can manually calculate APY.
Banks will not always be willing to give their value, because they prefer to boast of other and more attractive parameters. Nothing attracts customers like an advertising slogan with low-interest rates.
In this case, the banking institutions refer to a favorable nominal interest rate on the loan. However, in contrast to the APRC, the nominal interest rate does not reflect the total cost of the loan (commissions and other fees) but only the cost of capital. It is only a kind of agreed fixed interest rate, which does not take into account the increase in prices (inflation). It can be fixed or variable, although the former usually more often applies to deposits than loans (eg held deposits). The variable means that the interest rate on the loan may be increased or decreased during the repayment period. However, a fixed interest rate is not always tantamount to lower credit liability costs. For mortgage consolidation loans, a variable interest rate is more often used.
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When determining the variable interest rate, the value of the loan margin and the reference rate are taken into account. To calculate it, subtract from the former the base rate. The bank’s loan margin corresponds to the difference between the interest rate of the loan itself and the market interest rate and is nothing else than the bank’s profit that results from the repayment of the client’s financial liability. It is an invariable factor throughout the entire debt repayment period and the higher it is, the higher the borrowing costs are of course.