APR and interest on microloans
In view of the economic difficulties of recent years, traditional banks have tightened the lending process, causing many clients to run out of economic resources when they need it. A solution goes through microloans. You can not say that a microloan serves as financing. Rather it is a short-term solution (30 days) to obtain liquidity immediately with a previously defined fixed cost. Although the purpose of today is not to explain what microloans are, we talk long and hard when we explain how to use microloans. This time we are going to focus on interest and the APR rate.
What is the interest of a microloan
The interest is the price of money. We will consider the loan as a rental of a home, for example. When you rent a home you enjoy it for a while, paying a series of monthly payments and then you have to return it to its rightful owner. The same thing happens in a loan. hemibank “rents” you an amount of money, up to a maximum of 500 euros. Being a microloan the “rental contract” lasts a maximum of one month. Upon expiration you must return the money, paying the rent in addition. That “rent” is the cost of our microloan. Since it is a micro loan in such a short term, in reality its cost is more linked to an urgent “making available” of the money in the client’s account than to a specific interest rate. In a personal loan or a mortgage, the “rent” is extended for several years, so the interest is applied to the entire return period. To this interest are added opening commissions, cancellations, revisions and how many parameters the lender establishes. In order to avoid that the clients are called to deceit from the Bank of Spain a form of equalizing all the loans, mortgages and interests of the banking products was established. It is what is known as APR.
What is the APR?
TAE is the acronym of Annual Equivalent Rate. In short: the percentage of the loan that has to be paid to the bank, plus interest, commissions and expenses associated with the loan (something you will not find in the Microloans of hemibank). With the APR it is possible to compare all the products, allowing the client to compare between the different options without having to consider all the expenses attached to the loan or deposit. The APR applies to loans, mortgages and deposits; any bank product susceptible to a refund of money by any of the parties: bank or client. The APR is a very useful fact when the loan exceeds the year, which is your reference. To calculate the APR of a loan, the principal capital (money that is lent), return period (in years), opening commission and other bank commissions and nominal interest (calculated for one year) are taken into account. With these data a monthly fee is fixed and the APR is calculated. The fewer commissions a product has, the more approximate the value of the APR and the interest.
The APR in microloans
In order to guarantee that the client has the maximum information and to allow him to compare products from different entities in a more comfortable way, the current legislation on financing obliges (also to hemibank) to inform about the APR. We allow ourselves to remember that TAE responds to the Annual Equivalent Rate. We underline annual because it is an unhelpful period of time in microloans. Microloans are limited in the amount of money and the return period. In our case, we insist that our clients match the return of the loan with the day they collect the payroll, so that they do not consider the microloan as a form of financing, but rather as a payroll advance or an advance payment.. An opportunity to obtain money when necessary. In a quick loan, the maximum repayment period is 30 days, far from the year indicated in the APR. Therefore, although we are required to report the APR, it is not the best data to express its cost.
What is the real interest of a microloan
You already know that the APR is calculated taking into account the capital, interest (plus other costs) and amortization period. As we have indicated, the Annual Rate is not the best indicator to calculate the cost of a monthly product, since what it does is multiply the return period until the end of the year, but with the addition that in each stretch the costs of the previous section and consequently a multiplier effect is produced. For example, a 30-day loan multiplies it continuously to complete the annuity. The logical thing to do would be to think that it does it 12 times, but it is not like that, since in each maturity it adds over the principal the fees of the period and calculates the cost over an increased principal, realizing this multiplier effect 12 times and distorting the real cost in financing. less than a year. In microcredit, the cost can be around 1% per day. Consequently, the maximum annual cost would be 365% without considering the multiplier effect, which may exceed 2,000% considering this effect. Therefore, with an equivalent daily real cost between loans, the APR differs significantly between a 7-day loan or a 30-day loan (because in the first case the multiplier effect is performed 52 times and 12 in the second). In this sense, the best example is to take it to an analogous situation of daily life. Would it make sense for a taxi to express the price of a 20-minute race, explaining the cost of its use for a whole year? Or that a hotel will quote your rooms for the annual cost?
– The cost of the room is 16,425 Euros per year.
– Very simple, 45 Euros per day x 365 days.
-… okay, okay, tell me what it costs me one night. And do not include me breakfast please!
And that in this example, when not dealing with interests, there is no multiplier effect, explained before. In this sense, so that you are clear about the cost of a Down Payment, we use a calculator (sliders) that shows you at all times the fees based on the amount and the days to return it. A much more logical data, we believe, than the annual percentage. Do you still have doubts? Call us Our customer service department is here to help you.