Even for those who know more about the subject, controlling the function of each and every one of the financial terms, such as the different interests and fees associated with a loan, can be difficult.
Surely the word TAE sounds familiar, especially if you’re looking for funding, but …
What does it mean exactly and what is it for?
Annual Equivalent Rate (APR)
Let’s start with the principle: the word TAE corresponds to the acronym Annual Equivalent Rate, or what is the same, the total payment that a consumer should make for a loan if it lasts for a year.
The APR collects both interest and commissions, and includes any expenses associated with the loan or additional fee payable, expressing this total payment as a percentage.
What is it useful for? Precisely for this: know the annual percentage to be paid for the enjoyment of a financing service. In this way, a user can use this percentage as a basis to calculate what they must pay according to the duration of their loan.
In addition, when collecting all the additional expenses of a loan, the APR is very useful for comparing several financing products , thus being able to choose the most profitable one.
But as for everything, there are exceptions.
And these exceptions are very short-term financial products, such as on-the-spot online credits or immediate response online loans, and payroll advances or mini-credits.
The reason is very simple: while the APR is an annual rate, these types of products are characterized by a duration of no more than 30 days, so it is not possible to estimate the total to be paid effectively , and of course, it is not possible to compare them with each other, especially if the duration of each of them varies in a few days.
Being a small amount of money in an extremely short period of time, the best solution to compare these types of products is the daily interest rate , that is, the percentage that would be paid for each day of loan enjoyment.
In this sense, the daily interest rate on immediate loans in Spain is usually around 1.1%.
Having said that, as long as it is not one of the products mentioned above, the APR will be very useful when choosing which loan is best for you, especially in terms of profitability.
Below we show you in a very visual way everything you need to know about the APR, including a graph in which we explain how you can calculate the APR yourself, extremely easily. We hope you find it useful!
- A: Loan interest rate. That is, the (TIN)
- f: This is the frequency of payments for one year.
For the frequency of payments, if paid once a month, there will be 12 payments (1 payment each month). If you pay each quarter (3 months), it would be paid 4 times a year: f = 4. If you pay annually: f = 1.
Difference between APR and TIN
The APR is a very reliable indicator to know how much money the bank will charge us. In addition, by law, banks and lenders are required to specify the APR they charge for the products they offer.
As users, the APR will serve us more than knowing the TIN since it does not include some commissions and will always be lower.
The TIN (Nominal Interest Rate) is the type used by banks to contract financial products and reflects the interest that must be paid in exchange for obtaining a sum of money for a specific period of time.
In summary, it indicates the percentage that the lender receives for transferring the money and does not take into account other expenses associated with the operation.
Tips for using the APR well
In order to clarify the TAE concept further and how users should interpret it, there are agencies that offer advice such as the OCU and the Bank of Spain.
These are the 4 tips that organisms agree with:
- You must use the APR when you want to compare loans and credits that are for the same term. Depending on the term for which you calculate, you will have some commissions or others.
- Never compare the APR of a fixed loan or credit with one of a variable since in the variable, it will always be a theoretical APR since you cannot know in advance the evolution of the benchmark. In fixed loans, at a lower APR, less money to pay.
- Do not compare the APR of loans and personal loans with that applied to mortgage products. There are expenses in a mortgage loan that are not included in the APR such as mandatory insurance, notarial expenses or expenses for funds transfers, among others.
- If you need to calculate the APR, or do it by hand, with the help of an Excel or you can go to the simulator offered by the Bank of Spain specifically for loans and deposits.
Conclusions on the APR
The Annual Equivalent Rate helps us to compare the financial products offered by banks and lenders and that, by law, are required to show it.
We advise you to always read the fine print and look for a simulator to know the real price you will have to pay when you apply for a loan or credit.