Effective Rate: Concept and Purpose

At the present time, the financial and economic state of the state is completely determined by the state of the banking system. On this basis, the financial structure of the state should develop with positive dynamics and be strengthened, and ceaselessly. This need is inevitable, since banking institutions form one competing confrontation in relation to the other, aimed at expanding the potential client base. Banks today have a huge range of all kinds of financial plan services, both for businesses and individuals. Meanwhile, the fundamental direction of banking institutions is determined precisely by lending, the income from which in most cases is obtained from such an indicator as the effective interest rate.

Lending to firms and individuals for any bank is a priority way of making a profit. It is on this basis that the provision of loans for banks is the main activity. The lending itself can be carried out according to different schemes and directions: consumer loans, loans for the purchase of housing, loans for business and so on.

Banking institutions attract their clients with a variety of methods and shares, including: low interest rates and effective interest rates. In addition, banks often offer interest-free loans, comfortable schedules and original options for repayment of arrears. In most cases, these marketing moves are a common trick of financial organizations, since no one will work at a loss. Therefore, it would seem that an effective rate on a loan is sure to bring a bank income.

Even if the interest on the loan is minimal or there are interest-free loans, the bank will receive revenue from all sorts of customer service fees.

That's why every client should know what an effective bet is. If the borrower does not have sufficient knowledge and skills of calculations, then this indicator should be calculated by the credit specialist when consulting on the terms of the loan.

The effective interest rate is a full credit value that contains, in addition to the nominal interest rate, the costs associated with the processing and subsequent servicing of the loan. Based on Russian legislation, since July 2007, all banking institutions must provide borrowers with calculations of the effective interest rate on the loan. For the client of a banking institution, this is useful because it is possible to really assess the upcoming overpayments. There are a large number of variations in the calculation of the effective interest rate. Users of the World Wide Web are given the opportunity to calculate it through a specialized calculator placed on the portals of banks. In order to get a full calculation, you need to know all the payment indicators that you need to pay for the crediting period. The effective rate for the full term of the loan is distributed and is characterized by the percentage of the loan amount.

Before the loan is issued, the borrower must thoroughly study all the points and conditions of the loan contract, and in particular the section dealing with the effective interest rate. It will not be superfluous for a one-time acquaintance with several banks to make the right choice.

Naturally, not for all borrowers, the effective interest rate is the main criterion for choosing a bank. Many borrowers give preference to reliable and trusted banks that have a worthy reputation, even despite the high interest rate.