What is the APRC and why is it worth asking about it when borrowing money?
In fact, neither the amount of the loan nor its interest rate is the most important when looking for the best offer. What the borrower should pay particular attention to is the indicator hidden under the mysterious abbreviation APRC.
Why is it so important when taking a loan? Advertising is the leverage of trade, and also in the case of both bank and non-bank loans, it usually attracts potential customers.
Tempted by low-interest rates and a relatively long repayment period, they no longer pay attention to what is usually written in a small print. It turns out that this seemingly insignificant element is the most important when choosing a loan offer.
APRC – what does this mean?
The actual Annual Interest Rate, and therefore the mysterious APRC, often has little to do with the interest rates at which banks and non-bank institutions tempt potential borrowers. APRC is nothing more than the total cost of the loan that each borrower must bear.
This is the cost factor for calculating the loan. Borrowing does not stop and is not limited to the bank paying a certain amount. In fact, the loan repaid later is slightly different from the starting amount.
Importantly, financial institutions are required to inform the customer in advance about the APRC of a given loan or loan. However, customers do not always know how to interpret this value. And the truth is that the APRC was introduced to harmonize the rules on which banks and other institutions grant loans.
What does the APRC consist of?
This indicator shows us how much credit or loan will actually cost us because a few more elements should be added to the final bill. The basic costs that must be taken into account are primarily the interest rate on the loan, commission for the bank and loan insurance. However, banks often include in the RSSO additional costs usually associated with the provision of credit services.
In this case, we may encounter fees for examining the loan application, at the cost of valuing the property in the case of a mortgage and taking into account the repayment period. Importantly, another important element considered by the APRC is the value of money over time.
This means that the bank also takes into account the period for which we will have borrowed money. Most often, the shorter the repayment period, the higher the APRC, because after the first settlement period, which in almost all cases is one month, we pay interest to the bank, so we repay the debt owed to it.
Theoretically, the loan amount available is decreasing. The time value of money is best seen when the bank does not include any commission or additional fees, only interest. It would seem that the APRC will be equal to the interest rate on the loan. However, this is usually a few percentage points higher, precisely because of the time value of money.
It should be remembered that the amount of the final surplus that the borrower must repay will be influenced by the type of installments. With the same APRC, but different types of installments, the final cost of the loan may vary. For a loan of 100,000 with an interest rate of 10% per annum, without additional fees, the APRC will average 10.5%.
In the case of fixed installments, where installments have the same amount throughout the repayment period, the total cost of the loan will be almost USD 160,000. USD. However, in the case of decreasing installments, where we first pay interest and a portion of capital that is gradually decreasing, we will only have to pay back to the bank 150,000. USD. However, this is not the rule.
Why is APRC so important?
APRC is the best factor in comparing offers, provided however that we can interpret it. Fortunately, the bank is required to provide us with what and in what amount constitutes the Real Annual Interest Rate. In seeking information about the APRC of a given loan offer, it may quickly turn out that what seemed to be the best offer on the market, in fact, is completely unfavorable for us.
Low-interest rates per annum are usually associated with higher additional fees. A lower APRC does not always mean a cheaper loan. It all depends on the elements that make up it and the loan amount and the repayment period.
Knowing the APRC of several loans from which we will choose the best offer for ourselves, we can easily calculate which of them will actually be the most profitable. It is important, however, that the APRC takes into account all additional fees, periodic promotions and other indicators that affect the final appearance of our loan, so its assessment should not cause major problems.