The standard annual rate stipulated in the credit terms has long since ceased to fully reflect bank charges. In other words, you have to add to the initial annual rate all commissions and other expenses to get the full credit service.
Annual Interest Rate (APRC) – This is the full cost of the drawn credit expressed as a percentage of the amount of credit received. In addition to interest, the annual percentage rate of charge also applies to the additional fees and commissions the borrower will have to pay when applying for the loan. In other words, the annual interest rate is called the “efficiency rate” – these are identical indicators that determine how much the loan will cost the borrower.
The loan interest rate is calculated using a special formula developed by the Cabinet of Ministers in 2010. Since then, it has been used by all Latvian banks to calculate an average statistical interest rate .
We calculate the annual interest rate ourselves
If you decide to calculate the annual percentage rate for your planned loan yourself, you will only need a piece of paper, a pen and a calculator. Calculation steps:
- We add up all the monthly payments for one year, these numbers can be taken from the repayment schedule offered by your bank.
- To this is added any commissions we will have to pay before we receive the money (interest on cash withdrawals, application fees, commissions for signing the contract). At this stage, it is important to remember about any additional expenses you will have to pay to the bank without the main interest.
- Depending on the type of credit you choose, individuals are required to take out insurance, and this is often the case for large amounts of money.
- Add in the amount you get to the cost of servicing your account, card, plastic delivery, etc.
- The amount obtained should be divided by the loan repayment period (months) and multiplied by 100% – this will also be the annual interest rate or the fee the bank uses for the money.
This calculation allows you to realistically estimate the overpayment of interest and understand which offer is the most advantageous.
Why Banks Set Two Interest Rates
Two interest rates do not mean that the bank wants to mislead its customers or hide real numbers from the borrower. The fact is that every bank offer only provides an approximate interest rate. To know your individual interest rate, you need to submit a loan application and information about yourself, including your financial situation . Once the bank has processed the application, it will let you know how much money and interest you can expect. This will be the minimum borrowing rate. Including additional credit servicing costs in your total payout will allow you to get a 12-month real interest rate (APR).
In addition to the interest rates under consideration, there is also a floating interest rate. Floating rate – this is the interest rate on loans to companies and individuals without a fixed amount. It is determined by combining two indicators: the interbank interest rate of the Bank of Latvia and the fixed interest rate. The first interest rate can change as often as the bank itself – the lender – has planned (daily or monthly). This time period is called ” percentage periods “.
Interest statistics in Latvian banks
In order to see how interest rates on loans in Latvian banks are changing, we used country statistics for May 2018.
1. Interest rates on interbank loans (in euro) decreased by 0.4-0.3% per annum over different periods.
2. Interest on foreign currency loans with the following repayment periods:
- 1 day – 12/01%
- Up to 1 month – 4.93%
- 1% to 3 months – 1%,
- Over 3 months – 12/06%.
3. Loan interest for Latvian companies and private individuals:
- Loans to euro companies – 2.96% per month,
- Loans to individuals EUR -5 / 42% per month,
- Loans to companies in foreign currency – 8/28% per month,
- Loans to individuals in foreign currency – 7.74% per month.
4. The average annual interest rate on loans in euro in 2017 was 2.64%.
Such bank interest could be found in Latvian banks in 2017 and 2018. For lenders, these numbers are a benchmark for the profitability of their programs. Borrowers need to be cautious: a low annual percentage rate does not yet indicate that this loan will cost you less than others. To accurately gauge the profitability of one or the other credit offer, you need to compare the APR, then the credit will already be realistic.