The interest rate of the loan is not the only cost that the borrower pays. Credit institutions also charge other fees and commissions, so a special metric is required to determine the total cost of the loan.
What are AEDs?
Effective APR is a metric that shows you the total cost of the loan. DAE makes it easy for you to compare loans from two or more different financial institutions and determine which credit option is best for you. To establish the DAE indicator, a complex mathematical formula was decided at the European level, which each entity had to implement in its credit calculator. In principle, it is important to know that the calculation of the APR includes the interest rate and all the commissions charged by the financial institution when granting the loan.
If the contract does not specify a credit limit, the amount of the loan granted by the financial institution is considered equal to an amount equivalent to 2 lei.
APR values should be determined for any type of loan, including auto and personal needs, as well as mortgages. APR values vary based on loan amount and repayment term. If the loan amount has a large impact on the APR, then the payment term has the largest impact on this metric. All costs are calculated on an annualized basis and then divided by the total repayment term of the loan, so this explains why the APR values for short-term flash loans are always higher than other types of loans. . .
For variable rate loans, the APR is calculated based on the fixed rate in effect at the time of the loan. In credit contracts that contain clauses that allow the interest rate to be changed during the term of validity, the future interest value cannot be quantified on the date of establishment of the APR. Therefore, the calculation of this indicator takes into account the assumption that the interest rate in force at the time of credit origination remains constant during the term of the contract.
For promotional interest loans, DAE must be calculated separately from the actual interest rate
For example, if lender X offers personal needs loans at an interest rate of 15.5 percent and a one-time origination fee of 3 percent, and lender Y offers an interest rate of 16 percent but a monthly administration fee of 0.2 percent, it can be difficult at first glance to determine which of the two offers is the most favorable. In its formula, the APR takes into account all the costs associated with the loan, giving you a more precise idea of the loan you want to get. Therefore, it should be known that the lower the DAE indicator, the more favorable the loan is for the debtor. However, to properly compare loan quotes from several different financial institutions, you should also consider other DAE-related aspects.
Be careful when comparing fixed and variable rate loans!
Comparing loans with different interest rates can be confusing because the APR calculation formula takes into account the assumption that the variable interest rate from the time the loan is originated remains constant for the life of the loan.
Provide professional advice to loan applicants.
APR is the best criteria for choosing a loan, not the monthly rate or the interest rate. Don’t be fooled by a lower interest rate loan, which may have a higher APR. This is because the lender charges more commission or fee for this loan. If you’re looking to refinance a loan, APR is also the most relevant metric to see if a new loan offer is better than your current loan offer.
Failure to make loan payments on time can lead to fairly severe penalties, including freezing accounts or delaying registration with the credit bureaus. From the moment you present yourself as a bad payer, it will be more difficult for you to get a new loan in later periods. In conclusion, there are many aspects that you should consider before applying for a loan and one of the most important aspects is the total cost of the respective loan.
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