Are you thinking of taking a loan from a bank? To choose the right offer for you, you need to be aware of the costs associated with this way of raising funds. Banks are not charitable institutions, and granting loans brings them tangible profits. Banks impose numerous fees on borrowers – commissions, preparation fees and interest. These last have the greatest impact on the total cost of the loan and the amount of the monthly installment. Their amount results directly from the interest rate on the loan. These, in turn, are set by the bank based on interest rates and the lombard rate. The loan interest rate can be both fixed and variable. Before we take a loan, it is worth knowing what kind of interest rate is the most advantageous and which loan offer is the most advantageous for us. In this article you will read about loans and their interest rates.
How do banks grant loans?
Banks in Poland are under the constant control of the Polish Financial Supervision Authority. It is an institution that watches over the proper functioning of the financial market in Poland. The PFSA often issues recommendations containing prudential standards for banks that must comply with them. Bank lending activities are also strictly defined in the provisions of the Banking Act. Therefore, if the banks set high requirements for their potential borrowers, it results not only from the care for securing their interests, but also from the restrictions imposed by the law on the banks and institutions guarding the financial market.
Credit and its costs
To make money on loans, banks have to pay different costs. Therefore, they impose a commission on borrowers for granting the loan. They also often charge a preparation fee. It also happens that the additional cost of credit is its insurance. Then the insurance premium is part of the monthly installment. However, the most important component of a bank’s income on loans is interest. We pay them off directly in the loan installment. We pay interest to the bank for the possibility of using the money lent to us. The amount of interest depends on the interest rate.
Loan interest rate
The loan interest rate is provided by the banks on an annual basis. Its size may not exceed four times the lombard rate, which is determined by the National Bank of Poland. The interest rate can be fixed and variable. In the first case, the interest rate is identical throughout the duration of the loan agreement. The repayment schedule is also stable. In the case of variable interest rate, its value depends on several factors. Floating interest consists of two elements. The first element that is not subject to change is the margin. The second element is interest that changes. Their size depends on the reference point, which is usually WIBOR, i.e. the interest rate applicable on the interbank market.
Fixed interest rate is most often used for short-term loans. In contrast, variable interest is used for long-term loans. Floating interest seems to be a much more beneficial solution for borrowers. Especially now, when the Monetary Policy Council lowers interest rates. If interest rates are reduced, then the interest rate on the loan will also decrease.
We pay interest, which is a direct reflection of the interest rate on the loan, in monthly installments. Credit installments can be equal and decreasing. What is the distinction? Equal installments have a fixed amount throughout the loan period. The installment consists of capital and interest. In the initial stage of loan repayment, the interest part is higher than the capital part. Later, these proportions are reversed, but this does not affect the installment amount. This is unchangeable.
The loan installment may also be decreasing. Then, its amount is lower with the lapse of the loan period. This is because interest is calculated on outstanding capital. And since it is getting smaller, the monthly installment will also be smaller. It cannot be denied that decreasing installments are much better for borrowers.
APRC and interest rate
The interest rate is not, however, a measurable parameter for determining the cost of a loan. To estimate how much it will cost us to borrow, it is better to look at the Real Annual Interest Rate. The APRC includes not only nominal interest, but also all other fees associated with the loan – commissions, fees or preparation fees. In addition, it should also be mentioned that the APRC is identically calculated by all banks. The uniform calculation method makes it an excellent tool for comparing credit offers.