The Cost of Borrowing Money
The full cost of the loan is the actual money you borrow plus all of the interest you will pay. The full cost of the loan is calculated in annual percent. A credit institution is obliged to bring to the borrower information about the loan agreement before signing it.
The full cost of the loan is similar to the term annual percentage rate (APR).
Calculation of the total cost of the loan
Payments included in the total cost of the loan
1. Payments of the borrower under the loan agreement related to the conclusion and execution of the loan agreement, the amount and terms of payment of which are known at the time of the conclusion of the loan agreement, including:
- the amount of the principal debt on the loan;
- payment of interest on a loan;
- fees (commissions) for considering a loan application;
- commission for giving out a loan;
- commission for opening, maintaining (servicing) the accounts of the borrower (if their opening and maintenance is due to the conclusion of a loan agreement);
- commissions for operational services;
- commissions for issue and annual servicing of credit and settlement (debit) cards.
2. Payments of the borrower in favor of third parties, if the borrower’s obligation for such payments arises from the terms of the loan agreement in which such third parties are defined (for example, insurance companies, notaries). These payments include payments for the assessment of property being transferred as collateral (for example, an apartment, a vehicle), payments for life insurance of the borrower, borrower’s liability, and other payments.
If a specific third party is determined by the terms of the loan agreement, the rates of that person are used to calculate the CPM. The tariffs used to calculate the total cost of the loan may not take into account the individual characteristics of the borrower (for example, his age or driving experience) and the subject of the collateral (for example, manufacturer, model or year of issue of the vehicle). If the credit institution does not take into account such features, the borrower should be informed about this. If, when calculating the total cost of the loan, payments in favor of third parties cannot be unambiguously determined for the entire loan term, the full cost of the loan includes payments in favor of third parties for the entire loan term, based on the tariffs determined on the day of the loan cost calculation.
In the event that two third parties or more are specified in the loan agreement, the loan cost calculation can be carried out using the tariffs of any of them with information about the person whose tariffs were used to include in the calculation the full cost of the loan, as well as information that if the borrower applies to the services of another person, the size of the credit limit may differ from the calculated one.
Payments by the borrower for insurance of the subject of collateral are included in the calculation of the loan cost in the amount proportional to the cost of the goods (services) paid at the expense of the loan, as well as the ratio of the loan term and the insurance period if the loan term is less than the insurance period.
Payments not included in the full cost of the loan
1. Payments that the borrower is obliged to pay not based on the loan agreement but on the requirements of the law (for example, upon conclusion of the compulsory civil liability insurance contract for vehicle owners).
2. Payments related to non-compliance by the borrower with the terms of the loan agreement.
3. Loan payments stipulated by the loan agreement for servicing the loan – their amount and (or) the terms depend on the decision of the borrower and (or) the version of his or her conduct, including:
- commission for partial (full) early repayment of a loan;
- commission for receiving (repaying) a loan in cash (for cash services), including using ATMs;
- penalty in the form of a fine or penalty, including for exceeding the overdraft limit established by the borrower;
- fee for providing information on debt status.
For bank cards, the following items are not included in the calculation of the full cost of the loan:
- commissions for operations in a currency other than the account currency (currency of the pre-delivered loan);
- commission for suspension of operations with a bank card;
- commissions for crediting funds to other credit organizations.
If the loan agreement provides for different amounts of payments by the borrower on the loan, depending on the decision of the borrower, the full cost of the loan is calculated based on the maximum possible loan amount (overdraft limit) and loan term (bank card validity period), even payments under the loan agreement ( repayment of the principal amount of the loan debt, interest on the loan and other payments determined by the terms of the loan agreement). If the loan agreement provides for a minimum monthly (regular) payment, the calculation of the full cost of a loan is based on this condition.
Nuance in calculating the full cost of a loan
The loan cost calculation is carried out according to the compound interest formula and also includes income received by the borrower from a possible investment of the amount of interest payments on the loan during the loan term at the same interest rate as the loan. Thus, the full cost of the loan exceeds the interest rate indicated in the loan agreement even in the absence of commissions and other payments, but if the end of the interest period coincides with the moment of interest payment. With an increase in the time between the end of the interest period and the moment of interest payment, the total cost of the loan (in the absence of other fees) begins to decrease and may be several tenths of a percent less than the nominal rate under the contract.