What is an interest rate and why is it so important to evaluate the convenience of a personal loan? What is the difference between TAN and TAEG ? Let’s find out with this guide.
Interest rate of a personal loan: definition
Let’s start with the definition of the interest rate, applied in our case to personal loans. By interest rate according to the economic definition, we mean the percentage that is used for the calculation of the additional sum to the capital received owed by who obtains a loan. In signing a personal loan, it is implicitly accepted that the sum to be returned at the end of the loan is higher than the amount received.
The difference between the sum returned and the sum received is called interest.
What does the interest rate depend on?
The percentage of the applied interest rate depends on several factors. First of all, the possibility of repayment of the debtor; in fact, the greater the risk of non-solvency of those who sign the personal loan and the higher the rate applied. The rate also varies with time : often personal loans with a shorter duration have a higher interest rate, but this is not always true and varies greatly depending on the type of product.
It also depends on factors independent of the underwriter, such as the currency in which the loan is issued.
The maximum amount of the interest rate applicable to personal loans is established for our country by the Bank of Italy . It identifies each year the maximum rates applicable for each type of financial product subject to the calculation of interest. If an interest rate exceeds the established threshold, it is defined as usury and whoever applies it is for this reason prosecutable by law.
The different types of interest rate on personal loans
In the disclosure of interest applied to personal loans, there are two interest rates that are usually disclosed: the TAN and the APR . Let’s find out the differences to understand what is the rate to consider in order to evaluate the convenience of a personal loan.
TAN: the nominal annual rate
In the communication relating to personal loans, very often the TAN is used, ie the nominal annual rate . This definition means the rate that is calculated annually on the amount paid for the personal loan. Be careful though because the TAN does not really correspond to the interest rate that will be calculated on the amount received, as it includes only the rate and not any other different costs.
APR: the annual percentage rate
The APR, ie the annual percentage rate, is the interest rate that allows you to really know the cost of a personal loan.
The indication of the APR in the communication related to a personal loan is fundamental because it allows to understand the cost of the loan. It is therefore the interest rate to be considered in the comparison of personal loans.
Please note that the APR is usually higher than the TAN. When comparing different personal loans, pay attention to always compare the same type of interest rate.
The importance of the interest rate for personal loans
Comparing loans based on the applied interest rate is the best way to find the really convenient online or offline loan. As already mentioned, however, it is the APR and not the TAN as one might think, the parameter to be considered more. In fact, this type of interest rate considers the effective interest that will be applied to the loan, thus also including the costs arising from ancillary costs . Please note that the APR is always higher percentage than the TAN.
The easiest way to compare the various personal loans is to use an online loan comparator , a tool that in a few minutes allows you to compare different products, comparing, in addition to the interest rate applied, other characteristics of the loan as the maximum figures that can be requested and the maximum repayment times of the loan.
Rates on personal loans for particular profiles of applicants
As we have already anticipated in the paragraph concerning the parameters that influence the determination of the interest rate, it also depends on the risk profile of the applicant. In fact, the most risky profiles, such as bad payers or protestants , are usually applied to higher interest rates, to compensate for the higher risk from banks and financial companies in issuing personal loans. The difference between the interest rate applied to personal loans dedicated to these profiles and a standard loan is not always very high; the comparison is once again the easiest way to understand if a personal loan is convenient or not for that particular applicant profile.