I interest rates, today, are also on the agenda due to the ECB's monetary policy choices. Applying interest rates happens to many financial transactions, such as mortgages for buying a house, personal loans, credit cards, bank deposits or buying a car.
But actually of what do we talk about when do we refer to interest rates? What do we pay and why? Let's try to clarify things to invest our money more consciously, with the help of guide of the Bank of Italy recently published to facilitate understanding of the system even for less experienced users.
What is the interest rate?
In economics, the active interest rate represents the interest rate than a debtor must pay to a creditor for a loan received. In essence, the rate is the cost that a person or business must pay in order to borrow money: an addition to the amount that will have to be paid. Interest rates are usually expressed as a percentage of the total amount of money borrowed and are calculated on an annual basis.
Il passive interest rate, however, refers to the return that a bank or other financial intermediary offers its customers for deposits and savings. In other words, the borrowing rate is the interest rate that is paid on deposits.
Il reference rate is periodically defined, in the European context, of the European Central Bank whereas it was once decided by national central banks.
Interest rates matter why influence people's choices how to use their money. For example, if interest rates are low, people may decide to borrow money to invest or buy consumer goods. If interest rates are high, however, people may be discouraged from borrowing money, reducing spending and investment. The rate should always be considered when making trades. You need to pay attention to the contracts and compare the different services offered by the lenders, choosing the best option for your needs.
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The following here are the main types rate.
Nominal annual rate (TAN)
Il TAN represents the effective rate agreed between lender (such as a bank or financial institution) and debtor (for example a customer applying for a mortgage or personal loan). It is the cost of the loan, expressed as a percentage of the capital received e every year. For example, if a customer applies for a €100.000 mortgage with a TAN of 2%, this means that he will have to pay the bank €2.000 in interest per year for the entire term of the loan. This rate allows for determine the interest rate that the customer must pay to the bank against a mortgage for the purchase of a house or the return that a saver receives on his deposit. The TAN does not take into account any additional costs, such as preliminary investigation or collection costs, which may be applied by the bank. To have a more complete idea of the effective cost of the loan, it is therefore necessary to also consider other indicators, such as the APR (Annual Effective Rate).
Annual Percentage Rate (APR)
Il APR is a summary cost indicator which takes into account not only the interest on the loan, but also of all charges relating to the credit agreement, such as for example the costs of opening the case, management and collection. The APR allows the debtor to easily compare the different financing services offered by the credit institutions, thus being important for the purposes of transparency of the contractual conditions. The methods of calculating the APR vary according to the type of contract and the expenses included in the calculation may not be the same.
Average Global Effective Rate (TEGM)
Il TEGM is a global cost index of credit operations and is used as a reference parameter to check potential usurious situations as defined by usury law (L.108/1996). Every three months, the Bank of Italy carries out the collection of the TEGM, based on the reports of the intermediaries of the rates applied, in a given quarter, to various types of banking and financial transactions.
Effective Annual Rate (TAE)
Il TAE is a rate defined for statistical purposes, calculated on loans existing at a certain date and inclusive of interest and all charges charged to the counterparty. The TAE must be strictly connected with the indicated instrument and not constitute a recovery of the expenses incurred by the intermediary.
The quarterly survey (TAXIA) of the Bank of Italy
Il ECB regulation 2013/34 (and subsequent amendments) and the circular 248/2002 of the Bank of Italy provide for the detection of nominal interest rates receivable and payable applied to households and non-financial corporations, as part of the process of harmonizing monetary financial institution statistics. The data are collected in all euro area countries by their respective national central banks and are harmonized at European level.
La quarterly analytical survey of lending interest rates (TAXIA) of the Bank of Italy is aperiodic investigation conducted by the Bank of Italy among a representative sample of banks and financial intermediaries in Italy, in order to monitor the trend in interest rates applied to loans granted to businesses and households. TAXIA detects the interest rates applied to various types of loans, such as mortgages, personal loans, lines of credit and credit cards. The TAXIA therefore represents a simportant instrument for the Bank of Italy and for the Italian financial system as a whole, as it makes it possible to monitor the evolution of the economy's financing conditions and to evaluate the effectiveness of monetary and credit regulation policies.
