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October 4, 2022
Each loan is made up of two crucially important variables: TAN and APR. Their value is essential for the purposes of calculation of interest on the loan, as are other parameters, such as the amount disbursed by the credit institution, the duration of the repayment plan and the actual amount of the installments. Continue reading the article to find out in detail what they are, what are the differences and how they are calculated.
What is the TAN?
TAN it means Nominal Annual Rate. It can be defined as pure interest rate to be applied to the loan or theannual interest to be calculated on the loan. Answers the question of how much is the price requested by a credit institution for the disbursement of a specific economic amount on an annual basis and as a percentage.
In the loan repayment plansthe interest calculation is structured through the installment paymentusually on a monthly basis.
What is the APR?
APR instead, it means Annual Effective Global Interest Rate. It is a key indicator for the purpose of calculating the total loan. It includes a series of expenses, considered mandatory to open and settle the loan payment: preliminary investigation, file management, opening and maintenance of the current account, expenses related to payment transactions and mandatory policies are included in the APR.
On the other hand, taxes, notary fees and appraisal costs are not included. The APR, in fact, is theuseful indicator for comparing loans and loanswith a view to choosing the option deemed most convenient.
What are the main differences between TAN and APR?
Basically, the more evident difference between the TAN and the APR lies in the fact that the first is a percentage value on an annual basis, whose primary purpose is to define the interest related to the loan. The second, however, serves to outline the overall cost of the loanalso taking into account the so-called related ancillary expenses, such as for example the preliminary investigation, any insurance policies, stamp duty, costs for periodic communications, expenses for the collection of the installment.
Therefore, if the TAN turns out to have a direct effect both on the amount of the installments and on how much the loan costs, constituting a basic parameter for calculating the interest to be paid to the credit institution, the APR is an indicator that cannot be used to the calculation of the interest rate of the loan.
Calculation of the TAN and the APR: what to know?
The calculation of the TAN and the APR it is especially useful in the initial phase, when you apply for a loan, so that you can make a weighted choice. First of all, the calculation of TAN and APR varies in relation to interest rates. A loan disbursed at a variable rate, for example, is calculated by adding various indices, including the spread, i.e. how much the credit institution earns gross on that specific transaction, the ECB rate and the Euribor.
In the case of a fixed rate loan, the calculation is made taking into account the Eurirs indices. The latter describe the average annual interest rate that European banks apply to swap transactions, should the duration prove to be greater than one year. To these, it will then be necessary to add the spread of the respective credit institution.
Pursuant to the provisions of the Law, TAN and APR must be included in the pre-contractual documents that banks and financial institutions deliver to the applicant, such as the SECCI or the IEBCC. Obviously, then, they must also be indicated in the final contract.
To calculate the installment, the TAN must be kept in mind. However, the APR is the most useful indicator for assessing the convenience of a loan, as it includes the various ancillary costs and loan charges. Therefore, the total cost of the loan is precisely determined by the APR.
When calculating the APR, you will also have to add the principal made up of ancillary costs and financing charges to the interest, dividing it by the actual payments and not by the months of the repayment plan. Generally, if the installments are repaid monthly, the APR is higher than the TAN. Conversely, in the event that the repayment of the installments were six-monthly, the TAN and the APR would be roughly aligned.
How important is it to evaluate TAN and APR?
There evaluation of the TAN and the APR is essential at any stage of research e request for funding. Only in this way can you consciously and reasonedly choose the financial product that is most in line with your needs. Do not hesitate to invest some time because it will allow you to evaluate the commercial offers and to choose calmly also in relation to your availability, as an applicant.
Obviously, all this does not imply any commitment on your part, as you will not have to bear any type of cost, nor will you be subject to specific constraints. TAN and APR, in this phase, allow you to check the real costs of each financing solution and to compare it with others already seen, so that you can choose the least expensive one in an immediate and simple way. Once the evaluation work has been completed, you can proceed with sending the loan request.