The interest rate depends on the amount of loan/deposit, maturity of the loan/deposit, the level of the agreed interest rate and method of interest rate calculation used by a credit institution. It is usually calculated using the interest rate on the amount of funds granted or deposited. There are several different methods of interest rate calculation. The level of interest rate depends on the type of loan or deposit, loan/deposit maturity, competition, inflation rate, the country's credit rating, etc. Interest rates may be fixed or variable. When considering a loan agreement, attention should also be paid to the difference between the nominal and effective interest rates as well as interim and default interest rates.
Types of interest rates
Nominal interest rate − key interest rate for the calculation of interest, typically shown as an annual interest rate which has to be recalculated for shorter periods and is agreed either as a fixed or variable interest rate.
Effective interest rate − a uniform method of showing interest rates aimed at improving transparency and easier comparison of the terms and conditions for granting loans/making deposits between all credit institutions and credit unions. In addition to the nominal interest rate, the calculation of this interest rate also includes fees charged when a loan is granted or a deposit made and as such this interest rate gives a more accurate presentation of the total price of a loan/deposit. EIR provides more comprehensive information and enables comparison between individual offers so as to reach a decision on the interest rate best suited to your possibilities and expectations.
- appraisal costs for immovables and movables;
- public notary fees;fees for obtaining a land register certificate;
- fees for obtaining various certificates, statements, licenses and decisions from competent bodies and authorities;and
- default interest or any other charges or penalties incurred as a result of the borrower's default on loan agreement terms and conditions;
- postage, telegram and telefax charges; and
- other similar fees and commissions.
Interim interest rate − this rate is used to calculate and charge interest payable from the moment a loan is granted until the first loan annuity/instalment payment. Where a credit institution charges an interim interest rate, before concluding an agreement, the consumer is advised to check the best timing for the advancement of the loan so as to minimise the interim interest rate.
Default interest rate − charged on the amount of due unpaid liabilities under your loan agreement.
Interest may be calculated by applying the simple or compound interest calculation method. Irrespective of the interest calculation method, interest may be calculated and paid at the end of period or at the beginning of period. Detailed information may be found in the Decision on the effective interest rate of credit institutions and credit unions and on service contracts with consumers.
When calculating interest in the case where days are used for the calculation periods, one of the three possible methods may be used:
- the English method − under this method, the year has 365 days (leap years 366) and days in a month are calculated in accordance with the calendar;
- the German method − under this method, the year has 360 days and each month has 30 days; and
- the French method − under this method, the year has 360 days and days in a month are calculated in accordance with the calendar.