Interest calculation: the basis of the problem?
Take a good look at your agreement, because it is more important than you think. This time we are referring to the calculation basis of your interest; the factor that allows us to divide it proportionally into days, months or years.
Traditionally, banks have used the 360 calculation basis, commonly referred to as the "business year", dividing the year into 360 theoretical days. Until now, it had been considered a "banking custom" because of its repeated practice by institutions.
Today, however, it is quite different. This is basically due to the possible losses the customer may suffer with a formula that uses calendar days in the numerator and a commercial basis in the denominator. In addition, other circumstances have arisen:
- The modernisation of institutions' IT systems means that, at present, there is absolutely no technical reason for the use of the 365/360 methodology.
- A large number of institutions use the calculation formula with uniform periods, so that the previous banking practice of using the 365/360 formula could be deemed to have lost its status as such.
- In the area of mortgages, the new law on real estate credit agreements requires institutions to act in the best interests of customers and to save them possible losses.
Therefore, before signing up, it must be clear to you which calculation basis applies to your agreement: ask for the relevant explanations and read carefully the pre-contractual information that is given to you. Then, in settlements, you should know that the use of a methodology that combines, in the same formula, the calculation of time in calendar and business years to calculate the accrual of interest is considered contrary to good financial practice and custom.