When applying for a loan, Total Financial Cost (CFT) is the key factor in comparing different loan offers.
Today some consumers, in order not to lose their purchasing power and beat inflation, choose to buy long-term products in well-known home appliance chains.
Others, attracted by the advertisements of various banks that show interest rates in line with inflation, prefer to finance themselves with personal loans.
Whatever the case, it is no use comparing the interest rates advertised in the advertisements. What you really have to pay attention to is the fine print, specifically the Total Financial Cost (CFT).
What is the Total Financial Cost
When requesting a loan or financing in installments, there are expenses and commissions that are not reflected in the Annual Nominal Rates (TNA) that are shown in the advertisements (among them, life insurance, maintenance expenses, etc.)
The Total Financial Cost contemplates the final cost that the consumer must pay, since it includes not only the interest rate, but all this series of expenses and commissions.
Therefore, the CFT is the main variable to consider when choosing any type of loan.
Given this, if a bank offers a lower rate (TNA) than another bank, this does not necessarily mean that such a loan is more convenient.
To visualize it better, an example. Consider a loan of $ 20,000 for a 3-year term, according to the French repayment system and monthly periodic payments.
|Bank A||Bank B|
|“Basic” interest rate||eleven%||10%|
|Evaluation and granting expenses||No fee||$ 500 (at the time of granting the loan)|
|Account and associated maintenance expenses||No fee||$ 11 per month|
|Monthly life insurance on debt balance||0.04%||0.09%|
|Total Financial Cost||12.10%||14.96%|
The table above clearly shows that although Bank B has a lower interest rate than that of Bank A, the expenses associated with the Bank B loan are higher, resulting in the Total Financial Cost of Bank A lower.
Key points about the Total Financial Cost
- The CFT is expressed as an annual effective rate, as a percentage with two decimals (for example 43.26%)
- Banks are required to display information on interest rates of the credit lines offered as well as the CFT on whiteboards, placed in their branches.
- If it is a fixed rate loan, the Interest Rate (TNA) will not vary during the years of the loan, but this does not mean that the CFT does not change, given that, if the values of the associated expenses are modified (by example for inflation), the Total Financial Cost can be altered.
- When banks advertise their loans, they must assign the CFT greater or equal importance – in terms of size and time – than that assigned to the TNA, the amount of fees and / or their amount. In the case of operations agreed at a variable rate, the CFT is calculated based on the rate in force at the time of its conclusion, and it should be clear that this cost will be modified each time the interest rate varies.
- The CFT must be analyzed for each case, because there are factors that vary according to each person. For example, the client’s age determines a variation due to the insurance he pays. The costs of sending the documentation, the background of the client and the costs of ascertaining that background, or the lower risk of the loan due to the presentation of a guarantee, are examples of factors that vary the final cost of the loan. The term, the amount, the amortization system, and the collection or exemption of charges, are other elements that determine the CFT.