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The interest rates you are dealing with when applying for a loan are the “black beast” of the customers and the “golden goose hen” for the banks. The acronyms and percentages reported in the prospectuses of contracts that are heard in commercials often generate doubts and confusion. We try with this guide to untangle in the forest of rates and acronyms, to understand what you really must be careful and what in practice you go to pay when you borrow a sum of money at a bank or another financial institution.
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First of all, when asking for a loan, it would be a good idea to know correctly what is hidden behind acronyms like, Interbank, ISC or TAN, to understand how they are calculated and to compare them with other offers. More generally, the interest rate is the remuneration that is due to the lender (the bank or the financial) on the amount made available to the debtor.
For a loan contract, the interest is ultimately the compensation that the bank requires as a counterpart to the loan granted. Also the remuneration received when making an investment in cash or securities is represented by the interests, which in this case are called assets, and are calculated as those payable according to a percentage rate applied to the amount of money invested.
For example, the interest rate related to a mortgage is determined on the basis of certain parameters: the Interbank or the IRS, to which the bank adds a surcharge (in technical terms, the spread ) which represents the bank’s gain on the transaction. Same thing if to request a loan is a business. More in detail, the Interbank, which stands for Euro Inter Bank Offered Rate, the inter-bank offer rate in euros, is a reference rate which indicates the average interest rate of financial transactions between the main European banks.
The Interbank is used as the average rate applied by the main banks, with other major banks as counterparties, for forward transactions carried out on the interbank market with a maturity of one, two and three weeks, and one to twelve months. The Interbank varies according to the duration of the loan and does not depend on the amount of the capital. The Interbank, which is calculated daily, is therefore an indicator of the cost of short-term money and is used as the base rate for the calculation of interest on floating-rate mortgages.
The reference rate of the MB
The reference rate of the Mentao Bank is instead the rate at which the central bank based in Frankfurt grants loans to the Eurozone banks. The MB rate in a nutshell (it is appropriate to say so) represents the cost of money for banks operating in Euroland.
So if the MB raises the level of the rate, which is very far from these times of low growth and low inflation, the financing costs of the banking system increase and this translates into the rates applied to households and businesses that are increasing. Thanks to this tool the Eurotower can try to contain the fluctuations of the economic cycle.
The IRS (also known as Eurirs) stands for Interest Rate Swaps and is the interest rate used between two contractors to determine interest on loans. This rate is quoted on the stock exchange every day and serves as the basis for calculating interest on mortgages and fixed-rate loans. Here, too, the bank adds the spread that is said to be its gain.
Keeping in check the trend of the reference rate of the MB, the IRS and the Interbank serves to get a clearer idea of the current trend. The variations of the Interbank affect as we have seen on those who have contracted a variable rate mortgage, with direct effects on the installment.
TAN and TAEG
Of TAN and TAEG you can hear, for example, in advertisements for goods that can be purchased in installments, just think of a car rather than furniture to furnish your home. The advertising offers must necessarily report the ISC (Cost Synthetic Index) to protect the consumer. TAN is the acronym of Nominal Rate and gives us only information about the interest due on a loan in a year.
The TAN is calculated as the difference between the amount reimbursed and the amount received without considering other expenses, such as those of preliminary investigation. The TAN is therefore less indicative of the ISC – better still known as the APR (Annual Effective Annual Rate) – which instead contains almost all the items of loan expenditure such as commissions, investigative costs, insurance and policies related to the loan. In short, the Synthetic Cost Index is the most realistic rate, the one to which we must actually look to understand the cost of a loan and to compare the various commercial offers.