What is the TIN? How is it different from APR?
What is the TIN? The acronym TIN stands for nominal interest rate and is an interest rate imposed by the European Central Bank as a fixed percentage as payment for the money borrowed. It is an official interest, like the APR (Annual Equivalent Rate).
Definition of TIN
The TIN is the fixed percentage of interest that you agree to pay the bank or credit institution, for the money they have lent you.
In summary, the nominal interest rate is the fixed percentage that your bank or credit institution will apply on the money that it has lent you. It is the benefit that the bank will obtain for the loan and it is stipulated semi-annually, quarterly, weekly or daily, being set based on the inflation that exists at that time.
The TIN does not include all the expenses and commissions that are associated with the loans and that, in many cases, can affect the portfolio of the person who has applied for the loan. So let's try to shed a little light on this interest rate and other concepts associated with loans, mortgages and quick credits.
What is the TIN? How does it affect my loan?
As we have said, the TIN is a fixed interest rate and an informative indicator that is part of any loan that a bank or credit entity has. It is regulated by the European Central Bank and is official. It is the cost of the loan for the person requesting it. Although the TIN is important, it is not as relevant as the APR , which we will discuss later.
We will explain with an example.
Suppose we have a TIN of 1% per month, which is equivalent to a nominal 12% per year. We do not consider the periodicity of payments, which refers to the fact that, with the same TIN, the payment of interests will vary if they are annual or monthly.
With these conditions we request a loan of € 1000 and agree with the entity the payment of 25% TIN per year . This means that we will return € 1,250 after one year : the € 1,000 borrowed and € 250 in interest. But if we request the monthly refund, we will have to pay € 1020.83 , that is: the € 1000 plus € 20.83 corresponding to a single month.
It is easy to see that the TIN will affect our loan in one way or another depending on the time we need to pay it back.
On the other hand, the bank will set the TIN based on 3 assumptions:
- Inflation : based on a projection based on historical inflation (CPI), a possible future inflation will be set. In this way the bank will ensure that your money does not lose value.
- Possibilities of return : it is based on the risk possibilities that the credit can not be returned
- Current regulation
Finally, the Nominal Interest Rate (TIN) is not calculated by itself , but it is a piece of information that helps us to know the percentage that will be added to the borrowed money. The TIN does not give us complete information on how much that loan is going to cost us and we must take into account other data, such as the APR, which we explain below.
What is the APR and how is it different from the TIN?
The APR (Annual Equivalent Rate) is calculated from a standardized mathematical formula and is applied in all financial loan contracts : mortgages, credits, online credits, debt financing, Revolving type credit cards , savings accounts, investment funds, deposits ...
Usually the APR is higher than the TIN and that is where we should keep our eyes open: in advertising campaigns the TIN is offered as 'interest' on the loan, but in reality the interest that we must take into consideration is the APR.
The APR does not include the cost of concepts such as notary fees or other payments to third parties that may be applied at the time of contracting.
TIN and APR: differences and importance for the consumer
The TIN is an informative indicator, as we have explained previously, but it does not help us much when calculating the total of a loan . The important figure is the APR as it will show us whether or not we have obtained a loan in good condition for us.
The Annual Equivalent Rate is the real amount that we are going to pay for the money loaned to the financial institution. Like the TIN, it is a percentage of the total and it is the final amount that you will pay to the bank for lending you an amount of money, including extra expenses.
Although you must know the TIN and the APR, the TIN is only the amount of money that you will return to the bank, but it does not reflect the total returned.
Another practical case. We request an amount of € 20,000 to be returned in 12 months in which the entity will charge us 4% of opening commissions, the TIN will be 0% and the APR will be 6% . In this case we are facing a very advantageous loan, since the APR is really low despite having opening commissions .
How to calculate the Nominal Interest Rate
The TIN is calculated from the APR, hence you must know the APR and the TIN is always lower than the APR. Since the TIN is a nominal indicator, we can calculate it based on the interest presented by a product and if it is annual, monthly, weekly or daily. The TIN can be obtained with these operations:
Let's take a mortgage as an example , the TIN will be obtained by the sum of the Euribor plus the differential applied by the bank.
TIN = Euribor + differential
In the case of a mortgage, the Euribor marks the interests that are applied on that type of loan and the differential is the interests that the bank will mark.
In the case of a consumer loan, instead of the Euribor it is possible that the bank uses the Consumer Price Index to set future inflation and pass it on to the TIN.
We can also obtain the TIN from the APR with a much more complex mathematical formula or using an online loan simulator like the one we have on our Taichi Arts portal.
conclusion
When applying for a loan we must keep our eyes wide open. The TIN and the APR are important and we must be able to know how to interpret both figures. Its main difference is that the APR also includes the expenses resulting from the entire operation , including commissions such as amortization or cancellation.
The TIN, in conclusion, serves as information about how much we are going to return , while the APR will inform us of everything that we are going to pay for contracting a loan or banking product.