Be careful with the cost of borrowing!
If you need to borrow through small loans or consumer loans, take care that the effective cost of that borrowing is not hidden from you and don’t confuse the nominal interest rate (NIR) with the annual percentage rate (APR).
When looking at the cost of a loan, you have to consider:
- The NIR (nominal interest rate) is the price, in the form of a percentage, that the bank charges you for lending you the money. The NIR may be monthly, quarterly or annual, etc. that is, it does not always refer to the same period.
- The APR (or annual percentage rate), in addition to the NIR, includes the fees and charges associated with the financing, and it is expressed in the form of an annual percentage, i.e. it is always referenced to the time period of a year. Due to these characteristics, the APR is a good indicator of the real (effective) cost of arranging financing and it also allows you to compare loans: the lower the APR, the lower the cost of borrowing.
Therefore, a loan may have an NIR of zero but a positive APR since it does not bear interest but it does include some type of fee or charge. Be particularly careful on these occasions because this lending may be advertised as “interest-free financing”, referenced to the NIR. However, the APR will always tell you what the real cost of the loan is.
To find out what the real cost is, look at the APR!