· 5-minute read
What the effective rate is and how to compare two loan offers
A lower rate does not always mean a cheaper loan. The effective annual rate, which counts the fee too, shows the difference in one number.
The effective annual rate (FİFD in Azerbaijani, APR in English) shows what a loan costs you over a year. Besides the nominal rate it includes the one-off fee and counts interest as paid every month, not once a year. Any loan advert that states a cost must state the effective rate too.
An example: two offers
Say you need ₼6,000 over 24 months on 15 September. Offer one: 24% a year with a 1.5% fee (₼90). Offer two: 22% a year but a 5% fee (₼300). With equal payments the first costs ₼317.23 a month and the second ₼311.27: the second looks cheaper.
But the second loan puts ₼5,700 in your hands and the first ₼5,910. Counting everything, the first has an effective rate of 28.9% and the second 31.2%. The offer with the lower nominal rate is in fact the dearer one.
How the effective rate is worked out
The Central Bank’s rules for credit organisations set the method: find the yearly rate at which all the payments, each discounted by the days until it falls due, add up to the sum you actually received. Our calculator works out the effective rate exactly this way, payment date by payment date.
What to look at when comparing
- Compare the effective rate for the same sum and term, not the monthly payment.
- Ask about compulsory extras such as insurance, account opening or card fees: if they are compulsory, they belong in the effective rate.
- Check whether paying early is free: with us it is.
- Ask whether the late penalty is charged on the whole debt or only on the missed payment.
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