The cost of credit is all the expenses borne by the consumer for applying for a loan. These include interest, commission, margin, additional fees and taxes. Notary fees are not included in the cost of the loan.
The total cost of credit – the most important information
The definition of the total cost of credit is in art. 5 point 6 of the Act of 12 May 2011 on consumer credit. According to its wording, these are all costs that are associated with the loan, i.e. interest, fees, commissions and margins, provided they are known. The cost of additional services is also included in the total cost of credit, if they are necessary to obtain a loan.
Before submitting a loan application, the bank is obliged to provide us with a clear and legible way how much the loan costs. The presented list (simulation) should include the cost of interest, insurance (if we decide to do it) and commission. What must be in it is also the amount of the monthly installment and the manner of its repayment.
Not just interest rates
The banks of potential borrowers are tempted by, above all, attractive nominal interest rates. It is on its basis that interest is calculated, i.e. the bank’s remuneration for granting a loan. Interest is an important element of what constitutes the total cost of credit, but it is not the only parameter that determines the attractiveness and profitability of this financial product. The Actual Annual Interest Rate (APRC) is also important, the amount of which, pursuant to the Consumer Credit Act, is also required by the bank to inform us.
Contrary to the aforementioned interest (we will not avoid it), all kinds of additional costs (e.g. commission) are charged for specific actions taken by the bank (they are of course connected with the loan granting process).
When applying for a loan (regardless of whether it is a cash or mortgage loan), we must take into account the need to pay a preparation fee and that a commission will be charged to us. Its amount depends on, among others on the loan amount we apply for and how our creditworthiness will be assessed.
In most banks, we will have to insure it to get a loan. It is worth doing because insurance is a kind of security cushion for us – it guarantees repayment of installments even when our financial situation (e.g. due to illness or job loss) changes. If we decide to take out insurance in some banks, we will receive a loan on better terms than if we had not taken out the policy.
What determines the amount of interest?
An important component of the interest rate is WIBOR (for loans in PLN) or LIBOR (for loans in Swiss francs). These ratios indicate the current interest rate on loans offered on the interbank market in Warsaw and London, respectively. These rates are subject to constant fluctuations and we have no influence on their amount. It is worth figuring out whether WIBOR 3M (three-month) or slightly higher WIBOR 6M (six-month) will be used for our loan, because both of them involve the interest that will be charged to us.
What influences the interest rate is also the bank’s margin. Its amount (in contrast to the discussed indicators) can be negotiated. The margin may be reduced, among others when we have a high own deposit or an attractive (from the bank’s point of view) type of collateral.
Before entry to the mortgage
If we apply for a mortgage, what we will have to add to the related fees is the bridge insurance premium. We have to pay it until the mortgage has been legally established. There are banks that do not require this kind of security, but even if we miss bridging insurance, the lack of it will reflect a higher interest rate. It is worth knowing that if the mortgage is established while the insurance is in force, we have the right to demand a refund of the premium for the unused period.
Can commissions be avoided?
From the perspective of the future borrower, a significant cost of credit is the commission for granting it. If the bank does not order us to pay it immediately, it will add the commission to the total cost of the loan (which means we can easily overlook it).
Just like the bank’s margin, so can the commission be the subject of negotiations. Banks that offer loans without a commission compensate for their lack of buying additional products (e.g. setting up an account, using a credit card, etc.). Before we decide on it, it is worth estimating whether the cost associated with, for example, maintaining an account will be higher than the benefit of no commission. We should remember that the shorter the term we take a loan, the more the commission will be felt for us.
Equal or decreasing installments?
The repayment method also depends on the cost of the loan. If we decide on equal installments, we will have to pay more for interest than for decreasing installments (which results from the fact that in the latter case we pay more capital from the beginning, and thus our debt to the bank decreases faster).
For a mortgage it is also important how high own contribution we have. If it is small, we will have to take out insurance related to low own contribution. We have to pay such insurance until we collect the amount required by the lender. It is worth knowing that the higher the own contribution, the better credit conditions we will be able to count on.
The loan period is also important. On the one hand, the longer it is, the more interest will increase. On the other hand, the shorter duration of the contract translates into a higher installment, because we have less time to pay the debt.
What does the cost of the loan consist of? Summary
How much we have to pay for the fact that we borrow a certain amount from the bank is one of the most important (if not the most important) criterion when choosing a loan. Its final cost consists of interest, commission for granting the loan, fees related to the loan (e.g. cost of real estate valuation with a mortgage loan) and the cost of additional collateral (including insurance). It is also worth paying attention to fees related to such issues as the cost of converting the loan, early repayment of the liability or any annexes to the loan agreement.