Whether in investments, loans, or financing; in the information related to any of these types of products, or when we try to access them by hiring them, fundamental data and nomenclatures such as the TIN will have to be handled.
One of the most relevant aspects to take into account if a loan is requested will be its interest rate. On many occasions however it could be confusing.
There are concepts related to the issue that stand out, this one that we have mentioned and dealt with especially in this article, the TIN (Nominal Interest Rate), the APR (Annual Equivalent Rate), among others.
Let's see what the TIN is, specifying and delving into aspects related to this type of interest rate.
Interest rate
Basically an interest rate It will be the price that the money will have in a certain period of time in the financial market, this in an investment or credit.
In other words, the interest rate, also known as the interest rate, will be the payment to be made by the debtor to a creditor above the amount received in a given unit of time, for having used the money in that period.
Just as a good or service will have a price that must be paid in order to be acquired, money will act in the same way. Its use will have a certain price, which will be measured as a percentage of a principal, and is generally expressed in annual and percentage terms.
It is sometimes called in the financial world "the price of money."
The interest will be replacing the owner of the capital, that profit that he had been obtaining in another type of investment, and that he did not achieve by lending or investing in another negotiation.
An interest rate may have specific periodicity rates, which will be the frequency in which the interest will be settled as we have proposed. If it is on an annual basis: it will be settled once a year. Semiannual: Settlement twice in one year; and in this way in different cases.
At an individual level, an interest rate that is being expressed as a percentage will represent a balance between the risk and the gain of using a monetary amount in a specific scenario and time.
It is as we have said in a sense the "price of money", which must be being paid or charged for having been borrowed or loaned.
The interest rate will depend on "the law of supply and demand". In other words, it is being set by the market. Therefore, the lower the interest rate, the greater the demand for financial resources, and if it is higher, the lower the demand for these resources.
Nominal interest rate (TIN) What is it?
The nominal interest rate (TIN) is the percentage that will be added to the capital delivered as compensation during a certain time.
The TIN will not be taking into account other types of operating expenses such as: notarial documents, commissions or links that the product may entail, etc. It will be in theory, the percentage that the bank or finance company in question will be earning.
It is the profitability obtained in a financial operation, taking into account only the principal capital, that is, it is capitalized in a simple way.
There is a simple capitalization because the interest charged for a product will not be reinvested again. Not so in compound capitalization where interest is reinvested
In compound interest, for example, if the first month € 100 of interest is obtained, it is reinvested again, not with simple interest, where the interest goes directly to the account.
If we have the annual TIN, just by dividing it by the number of payments, we will know what interest we will be charging in each of the periods.
It is important to recognize that when working with the nominal interest rate, the "period of time" has to be considered in a special way.
The TIN does not have a standard reference period; It could be eg daily, weekly, quarterly, semi-annually, annually. Due to the fact that it does not include expenses, it makes it impossible to develop a valid comparison of products of the same natures.
As a result of this, the APR (Annual Equivalent Rate) arises, which simplifies this problem by taking the year as a base and allows comparing products of similar nature.. Later in this text, due to its implicit importance, we will see the differences between TAE and TIN.
The Nominal Interest Rate will be reporting in gross terms, which is the main difference with the APR. These two indicators will be agreed independently by each entity, and their value will be proportionally linked to the economic cycle and benchmark indicators such as Euribor or Libor.
How to know with the TIN how much interest will be paid?
By multiplying the capital by the TIN offered by a financial institution, it is possible to know how much interest will end up being paid. In this way it is possible to see if you are facing a cheap or expensive loan.
Example: A loan of € 2.000 will be requested for a year where the annual TIN is 8.5%.
In this case there will be € 170 in interest related to the TIN.
Variations of the TIN
The TIN can vary from bank to bank, but it still has variations in correspondence with the type of loan, the same from case to case.
Each institution in different circumstances, assumes strategies in this sense while it is within the legal limits where it operates.
The same entity could even be charging more to one person than another for a loan of the same conditions. It could be that one of them had more probabilities of non-payment derived from specific characteristics such as: low income, increased debts, lack of collateral etc.
As we have already explained, it is possible to have the nominal interest rate in various formats. It could be annual, monthly, or otherwise. When choosing the loan, you will have to pay attention to this aspect.
For a loan of 1.000 euros, if you have an annual TIN of 6%, you will finally have to pay 60 euros in interest. But if the TIN were daily, at the same 6%, they would finally be paying 21.900 euros.
It is of course an exaggerated example, but it exemplifies how the difference can be important if the TIN format changes.
In countries like Spain there are strict regulations in this regard, but in other nations they are more flexible and attention will need to be paid.
TIN and APR - Differences
Let's define both terms contiguously so that we can easily contrast them.
- TIN (Nominal Interest Rate): It will not be including financial expenses, commissions etc., without having a standardized reference duration. It will coincide with the APR only when the interests are being paid at the end and in the similar period of time.
Products of the same nature could become impossible to compare.
- APR (Annual Equivalent Rate): The reference measure will be the year. It makes it possible to compare products of a similar nature.
By contrasting both terms, we could conclude and add some ideas, let's detail some.
- When we talk about TIN we refer to the nominal interest rate, where the rest of the expenses and commissions that may be associated with the loan are not taken into account. These expenses will be included in the effective cost of the loan, your APR.
- The TIN is an indicator that can inform, but that will not be serving in this sense in a transcendent way to the consumer. Data included in the APR; such as: deadlines, commissions, etc. They may be giving a clearer vision of how much an investment will be contributing or how much a loan will be costing.
- In personal loans, the difference considering the percentage between TIN and APR, is usually greater than in mortgage loans.
- Just by knowing the TIN, you won't be able to know how much a loan will be costing. It will not be taking into account commissions, nor other expenses that the user will have to pay.
- With the same TIN, the amount of interest will be different if the payments proceed monthly, compared to a single annual payment for example.
We can conclude in this sense that the TIN can be an informative but very limited indicator.
The APR (Annual Equivalent Rate), is a more objective data to analyze to compare the cost of a loan, since it will be measuring the effective cost of the same in a specific term in a year, considering the commissions and expenses that the consumer and the frequency of payments.
There are various types of interest rates. Many key economic factors will be conditioning the differences between them. We have made special reference in this article to the TIN.
In the first instance, these technical variables may seem unimportant or significant, and it is a fact that on many occasions specific financial institutions have gained the advantage of the public's ignorance in this regard.
It should be made aware that in order to be smart consumers or investors, it will be necessary to understand basic and not so simple aspects in many cases, referring to these aspects.