The loan offers that the market makes available to those looking for financing are manifold: but what are the aspects that must be taken into consideration in order to understand whether these are convenient offers or not? Here’s how to evaluate the financing proposals you may be dealing with.
One of the first aspects to be evaluated is the TAN, fundamental for obtaining lower installments : it is the Nominal Annual Rate and is nothing more than the interest rate that is used by credit institutions to establish the amount of installments that must be paid every month for the purpose of repaying the loan.
The lower the TAN, the more advantageous the loan installment is. Obviously, one cannot limit oneself to the calculation of the TAN, since accessory costs must also be taken into account. The costs relating to these expenses are not part of the TAN but fall within the APR, that is the Annual Global Effective Rate.
Loan offers: beware of the APR
And precisely the APR is one of the elements to which it is good to pay more attention when comparing and comparing loan offers. In fact, in most cases the financial companies also include what are defined as ancillary costs in the cost of loans: this item includes all expenses that do not have to do directly with the repayment of the money or with the balance of interest, but they consist of the costs associated with the services indispensable for the provision and management of loans.
The list of fees can vary from case to case, but broadly includes:
- the closing costs of the case
- the preliminary costs
- the cost for the various periodic communications
- the stamp duty on the contract
- the cost of insurance, if necessary
- the costs of managing the installment and collection.
Here, therefore, that a correct and careful evaluation of the loan offers presupposes a detailed examination of the TAN and the APR. In particular, it can be said that the TAN is useful for analyzing a single loan proposal, while the APR allows you to compare multiple proposals. In summary, the Annual Global Effective Rate, which includes the TAN and ancillary expenses, is expressed with a percentage value and summarizes the actual – actual cost – of a loan, allowing us to understand whether it is worth choosing or not.
Here’s how the APR works
To understand how the TAN and the APR work, we can hypothesize a concrete example that allows us to understand the two rates in detail.
If you ask for a loan of 10 thousand USD with an APR of 6.58% and a fixed TAN of 6.39%, a reimbursement resulting from a monthly installment of 195 USD and 20 cents for 60 months, that is for five years, with a sum total of 11,712 USD. If, on the other hand, the APR is 9.66% and the TAN is 8.72%, the installment to be paid every month is 206 USD and 23 cents and at the end the customer will have paid a total of 12,526 USD.
It may also happen that the APR is relatively high and the TAN is relatively low: with an APR of 10.13% and a TAN of 7.50%, the monthly payment is 207 USD and 39 cents and after five years the sum paid will be 12,650 USD. As you can see, in the second case the TAN is higher than in the third, but in the third one pays more in total than in the second: the “fault” is of the higher APR, which includes – as mentioned – also the accessory costs.
Another aspect that cannot be overlooked in the evaluation and comparison of loan offers is the cost of insurance, which, however, is not always mandatory. In fact, when signing a contract, it is essential to remember to check the presence of any insurance coverage, which could be optional or mandatory: it is clear that with an insurance, the amount of the installment rises inevitably. Of course, insurance coverage is not necessarily bad: on the contrary, it guarantees the client in case of unexpected events, such as the loss of a job.
With an insurance coverage, you are protected against the risk of insolvency and also in the face of negative events or unforeseen events, you can be sure of being able to support the economic commitment, given that it is the company that takes responsibility for repaying the installments. An insurance is mandatory if you use the assignment of the fifth, while in other cases usually the person requesting the loan is left with the opportunity to decide whether to use it or not, unless it is a very high amount. However, each case makes history in itself.
In conclusion, to evaluate the loan offers, the two most important values that should be taken into consideration are the TAN and the APR: it is important, however, not to confuse them, to avoid nasty surprises. Remember, the APR is the most complete index for a correct evaluation, nevertheless always check if all the ancillary expenses are included in the APR and if it remains fixed for the entire duration of the loan / loan.