Don't be fooled: the loan with the lowest interest is not always the cheapest

Comparing prices is the easiest way to save on the purchase or hiring of any product or service.

29 May 2022 Sunday 21:58
6 Reads
Don't be fooled: the loan with the lowest interest is not always the cheapest

Comparing prices is the easiest way to save on the purchase or hiring of any product or service. Let's say, for example, that a person wants to buy half a kilo of oranges in a supermarket. If you want to spend as little as possible, all you have to do is look at the cost per kilo indicated at the fruit counter and choose the cheapest brand.

This same logic can also be applied when comparing loans to finance an important personal project, such as renovating the house or buying a car.

In this case, the usual thing is to look at the nominal interest rate (TIN) of each loan, which determines how much interest will have to be paid to the financial company. However, according to the banking comparator, taking into account only this parameter is not a good idea, since these products may have other expenses. In other words, a loan with a very low interest rate is not always cheaper than another with a somewhat higher TIN.

When a loan is contracted, the money must be returned to the finance company in the agreed manner, which is usually by paying monthly installments. And the amount of these monthly installments is made up of the capital of the credit (what the financial company has lent) and the interest generated, which is calculated by applying the nominal interest rate on the amount pending repayment.

These interests are part of the benefit that a financial company obtains when it grants a loan. However, as HelpMyCash analysts point out, it is not the only expense that the debtor will have to pay. For example, it is common for many entities to charge an opening or study commission, which the client has to pay when signing the contract. The joint cost of both charges is usually between 0% and 3% of the amount borrowed.

Many finance companies, mainly banks, also require the client to contract certain products in order to access the loan: an account to pay the installments, life insurance... These services can cost money (the account maintenance fee or the insurance premium). ), something that must also be taken into account when calculating the price of a loan.

For this reason, if you want to pay the least possible money for a loan, HelpMyCash recommends comparing the full price of financing offers from various entities. And for this, they indicate that the most appropriate thing is to look at the equivalent annual rate or APR, which is a percentage that indicates how much a loan costs annually taking into account its interest, its commissions and the price of the associated products.

For example, let's say that a person has received financing proposals from two entities to obtain 10,000 euros to be repaid over five years. The first finance company offers you a loan with an interest of 4.50% TIN, an opening commission of 3% and an APR of 5.91%. To return this credit, the client will have to pay a total of 11,485.81 euros, adding interest and commissions.

The second finance company, on the other hand, offers you a loan with an interest of 4.95% TIN, without commissions and with an APR of 5.06%. In this case, the total to be returned will be 11,309 euros, that is, 176.81 euros less than with the first entity. It is shown, therefore, that the lower the annual equivalent rate of a loan, the cheaper it will be.

With this in mind, anyone interested in obtaining financing can consult the conditions of several loans to find out which one has the lowest APR. At the moment, the cheapest credits are offered by financial institutions that operate through the Internet. For example, the WiZink Loan stands out, with an APR from 4.59%, or the Cofidis Personal Loan, with an APR from 5.06%.

Now, there are more traditional finance companies (such as banks) with which you can negotiate to obtain similar or even better conditions. For this reason, it is advisable to request financing from as many entities as possible, compare the different offers and try to reach an agreement to lower the initial price proposed. On the HelpMyCash website you can find the complete list of financial companies that offer credits in Spain.



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