There is such an unwritten rule that the interest rate on deposits, savings accounts, bonds, investment products and even loans is given on an annual or annual basis, the so-called nominal interest rate.
Unfortunately, first of all, not many of us pay attention to this, and secondly, few of us know what it means on a yearly basis and how it translates into real profits or costs.
What is the nominal interest rate?
Nominal interest is the percentage profit or cost of the product given on an annual basis and without taking into account additional costs – this can be compared to gross remuneration, i.e. the amount that you will never see in your account.
Banks, when providing annual interest rates, do not take into account either the time of investment or credit, and thus – the frequency of accrued interest or additional costs, in the case of savings and investment products – 19%. Belka tax, and in the case of credit products – around-credit costs, i.e. commission or additional insurance.
How does nominal interest translate into our profits or costs?
As you probably already guessed, the difference between nominal interest rate and real interest rate, i.e. real return on investment, or APRC, i.e. real cost of credit, always falls to our disadvantage:
- In the case of deposits, savings accounts, bonds or investments, these additional factors mean that the real interest rate is lower than the nominal interest rate, and thus – the profit on our investments is lower.
- In the case of credit products, the opposite is true. Loan-related costs mean that the APRC, i.e. the actual annual interest rate is much higher than the nominal interest rate, and thus – the cost of our loan is higher.
How do you know the real interest rate on a savings and investment product?
Calculating real interest rates on deposits, savings accounts, bonds and investments is not so difficult. To know this value, you must divide the nominal interest rate by the number of days or months in a year, depending on whether the product duration is given in months or days and multiply by its duration.
Case study: Three-month Happy Deposit with a fixed interest rate of 4.00% per annum, with interest capitalization at the end of the contractual period.
However, it will not always be the case that the real interest rate will be lower than the nominal one. When will it be different? Then, when the investment lasts longer than a year – it can be in the case of deposits, savings accounts, bonds or investments, e.g. in condo hotels.
How do you know the actual interest rate on a loan?
In the case of credit, the matter is even simpler, because here you do not have to count anything, but only read with understanding. All you need to do is look at the APRC, which is the actual annual interest rate. It will show us how much the liability will actually cost us, including interest on the loan, commission for its granting, insurance and repayment period.
The difference between the nominal interest rate and the APRC will usually be considerable, but it is the comparison of offers based on this factor that will be more reliable.