The actual annual interest rate is an indicator of the total costs of loans offered by individual financial institutions, such as:
- Non-bank loan companies
The APRC is expressed as a percentage of the total loan amount presented annually. A complicated formula combining elements of mathematics and statistics is used to calculate the index. The principle of calculating APY is identical to the calculation of the internal rate of return, which is calculated by the banking and financial institutions that grant loans.
APY is a standardized measure of credit costs. It does this with the APRC a practical tool that allows clients to directly and immediately compare loan offers provided by bank and non-bank loan companies.
Amount of APY
The height of the indicator is generated by such factors as:
- loan interest rate
- additional fees (eg for insurance, for consideration of an application, etc.)
- repayment period
- number of installments
- the value of money over time
The Act on Consumer Credit imposes an obligation to indicate the number of APRCs for each loan and credit offer. Thanks to this, the consumer can easily and conveniently check the actual costs of the planned financial commitment and choose the most favorable proposal. It’s worth checking this indicator because its value varies from zero to even several thousand percent depending on the offer.
The actual annual interest rate includes subsequent loan installments, interest rates, insurance, commissions and other fees that the borrower must incur. Determination by the bank or non-bank institutions of the APRC of the proposed loan or loan allows the potential client to know the total amount that he will have to pay. This prevents fraudulent costs associated with concealing costs. As of 2011, banks are obliged to provide the APRC values in their information and advertising materials regarding financial products.
It is worth bearing in mind that lower APY does not always mean cheaper loans. The cost of a liability may differ due to, for example, the installment payment system. Then, even with the same APY, the cost of the loan with decreasing installments will be lower than in the case of fixed installments.
APY and RSO
APY is often confused with RSO, i.e. with the Annual Interest Rate. RSO is an indicator that only determines the costs of interest charged on the loan amount (ie the interest rate). In turn, the APR outside the interest rate on a loan or a loan also includes a commission of a loan institution, insurance and costs of additional services. For this reason, the APY is a more accurate indicator of the costs associated with obtaining a loan or a loan.