A bank is a commercial organization that makes money. Bankers are able to draw up contracts so that customers understand almost everything about them. Therefore, you should always carefully read the conditions, as well as pay attention to all indicators, the main of which is the total cost of the loan.
In this article I will tell you what the full cost of the loan is, what the numbers in the contract mean, what is included in the CPM and what is not, and how to reduce the CPK on consumer loans.
- 1 What is the total cost of a loan in simple words
- 2 Why the full cost of a loan may increase?
What is the total cost of a loan in simple words
In monetary terms, CPM is the amount of money that must be paid in excess of the cost of the loan itself, taking into account all interest, additional insurance and other mandatory payments.
UCS are indicated on the first page of the contract in the upper right corner. The Central Bank obliged each bank and MFIs to indicate this% in large print. Percentage shows an overpayment as close to reality as possible. And it will be higher than the loan rate prescribed in the contract.
What do these numbers mean?
For a bank, PSK is an indicator of the annual yield of a particular loan. These figures are used to analyze and forecast cash flows during the year. And they also form an insurance fund, which will have to transfer part of the money.
From the point of view of the borrower, CPM is an indicator of real overpayment. Or as close as possible to a real overpayment. There are loopholes in the legislation that some banks use, and therefore CPM can be much lower than the real value.
Why the full cost of the loan is higher than the interest rate?
The loan rate is the interest accrued on the principal amount. It is lower than the real cost of a loan at the bank, because in addition to interest, the borrower will have to pay for insurance, pay for the services of a lawyer or notary to arrange a pledge. There is still a credit card fee, a commission for making payments through terminals or applications, and many other hidden fees that are recorded in the CPM, but not shown in the rate stated by the bank.
Of all these little things, a higher real value of the loan is formed. And even so, the borrower will not get a real idea of how much he will have to overpay (if he does not count on his own).
- What is included in the full cost of the loan
- According to the legislation, CPM includes:
- Amount of principal This is the loan amount.
- Interest rate. This is the basic interest rate at which a loan is issued.
- Additional payments, if the issue of credit depends on them. Most often, this is the cost of paperwork or storing money in a bank on a mortgage or car loan.
- Card issue cost.
- Payments to third parties, if the issuance of a loan depends on them. These are notaries, insurance companies, lawyers who must prepare documents for applying for a loan.
- Banks are not required to consider in CPM:
- Payments required by law. For example, CTP in car loans.
- Payments for breach of contract. These are fines, penalties, etc.
- Payments that depend only on the decision of the borrower. This is a cash withdrawal from a credit card or an early payment.
- Collateral insurance. This is either a real estate contract or a hull insurance for a car as a pledge.
- Insurance with conditions. This is the most interesting point that you need to talk about separately.
In the calculation of CPM there is an important point that regulates the legislation:
But most insurance when issuing a loan is optional. And you can refuse them. Only the majority of employees will be much easier to refuse the borrower to draw up the contract and not spoil their statistics, than to issue a loan without insurance. This is a kind of “resale” on which their salary depends. In Citi Bank, VTB and other large banks, such cases are common.
The same applies to hull and motor third party liability insurance in car insurance. The Central Bank says that such amounts can not be taken into account, since this is a voluntary choice of the borrower. True, no bank will issue a car loan without insurance, but this is not the case.
That is why, although PSK is called the real value of the loan, but still this is an approximate indicator. And some banks take advantage of the fact that you can not take into account the additional cost of the loan in the contract.
The limit value of the total cost of the loan
According to the legislation, CPM cannot exceed the average value of the total cost of a loan in the country + 1/3 of this value. For example, if an average consumer loan is issued at 25% per annum, then the maximum rate will be 32.5%.
If the CPM exceeds the permissible indicator, the bank can either lower the interest rate and remove some obligatory payments, or hide optional ones, without which it will not give a loan to any client. And most credit organizations choose the second option.
Why the full cost of a loan may increase?
The cost of a loan may increase in several cases:
If the borrower has past due payments. The most common situation. The client stops paying for the loan, and the interest rate changes. And with it the full cost of the loan. Such a policy is found in many banks and in all MFIs.
When restructuring a loan:
When does a bank’s credit policy change? With a change of leadership or with a general change of course, banks often change their lending policies. And usually all loans become more expensive. Then for current customers, the conditions may also change. But this is a rare situation.
During the crisis period. At the beginning of 2015 there was a financial crisis. During this period, many banks felt a drawdown in finance. Some were even forced to close. Others changed lending conditions for both new customers and current ones. Crises happen once every 8-10 years, so you need to be prepared that the conditions for a long-term loan may change.
If the bank has reasons to doubt the solvency of the borrower. This is the rarest reason, and usually it concerns large loans to entrepreneurs secured by their own securities . In America, such a practice is practically not found.
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Banks rarely use the opportunity to change the terms of the contract and increase the% rate or shorten the loan term. Such cases hit the reputation badly, and the opinions of borrowers in the financial sector are valued dearly. MFIs are more willing to tricks when they change the terms of lending. The circuit is something like this:
In 2017, a significant case occurred. A pensioner was given a microloan, but she could not pay it on time. Initially, a loan was issued at 292% per annum. But after the conditions were changed, 2379% per annum were prescribed in the contract. Of course, this is illegal, which was proved in court. But this is not an isolated case, so when changing the terms of the contract in the MFI, carefully study the contract.
Calculation of the total cost of the loan
This is a complex formula, and even many bank employees do not know it. Therefore, it is easier to use a loan calculator. There are many of them, and they can easily calculate the full cost of the loan. But there’s a problem. The calculation methodology is different for everyone. The formula is the same, but there are many variables. For example, somewhere they take into account the amount of insurance, somewhere not. And therefore, to compare several offers in different banks, you Although the declared% loan rate is 28%, the real cost of the loan is 32%. And so you can calculate each bank offer and compare indicators. To find out the amount of a monthly payment for a specific loan, just go to the bank’s website, use a loan calculator, drive in the loan amount and term.
Where to see the full cost of the loan
The full cost of the loan can be viewed on the first page of the contract. It is located in the upper right corner and occupies at least 5% of the sheet area. This is the norm of the law, and banks are obliged to follow it. Before concluding a contract, the full cost of loans can be viewed on the bank’s website. This is also a mandatory legal provision. But banks are in no hurry to show UCS on the first pages and hide statistics as deep as possible.
For example, to find the full cost of Citi Bank loans, you need to find the footer “Information required for placement” at the very bottom of the page, select the item “Total cost of loans”. Or go through a search engine, driving in “Full cost of Citi Bank loans”.
How to reduce the total cost of a loan
Consumer loans are the most risky way to earn money for banks and the most expensive way to get money for borrowers. Both parties are interested in reducing risks and reducing overpayment. Therefore, there are a few simple tricks to help reduce overpayment:
Choose the best deal on the market. The main factor when choosing a bank is the real% rate. It is enough to compare the offers of the TOP banks in your city and through Excel to see where you will pay less.
Bring a full package of documents (in addition to the standard list).
Refuse insurance. This can be done either immediately or within 14 days after the conclusion of the contract. Bank employees may insist that insurance is required, but the law is on your side. If the dispute does not work, you can call the bank hotline and tell you that the employee did not give out a loan without insurance. This usually helps. But most importantly, count your strength! If you doubt that you can repay the loan yourself, it is better not to refuse insurance.
If possible, choose a differentiated payment , in which first the amount of the principal debt is reduced, and then interest.
Learn about early repayment fees. Some banks add this clause to the contract.
Increase loan term. Even if you want to repay it ahead of schedule, you should choose a longer period. The longer the term, the lower the interest rate.
Knowing these subtleties will help you to overpay on a loan less. But it is important to remember that early payments can worsen the credit history, so you need to weigh what is more important at a particular moment: pay less or then get a loan with a higher interest rate.
The full cost of a loan is an important indicator that you need to pay attention to first. It shows how much you overpay. However, most banks do not take into account additional payments, and as a result, the amount of the overpayment will be much larger. Therefore, always count on CPM yourself, compare the offers of banks and only after that make decisions about whether to take a loan.