Decreasing rates diminish the cost of credit up to 30%

When the customers access a credit, they pay a special attention to the interest rates, commissions, reimbursement period, eventual promotional offers, but especially they pay attention to the ways through which they can contract a higher credit. Some information are placed at the disposal of customers, other are just partially presented to them and in most of the times put the banks in a favorable light. There’s for sure that there are ways through which the cost of a credit can be significantly reduced, but these are usually hidden because aren’t profitable for banks.

One of the ways through which the cost of a credit can be significantly reduced is the pay back of the credit, respective in flat rates or decreasing rates. The experts say that each of those two options has advantages and disadvantages, but confronted each with another the second one has a net advantage. In these terms, the question of the bank officer: credit with flat rates or credit with decreasing rates, can bring to the applicant a gain of up to 30% when it comes about the final cost of the credit. This in the conditions of similar conditions of credit, respective the same sum, the same interest, the same commissions and the same reimbursement period. However, customers’ advantage represents the disadvantage of the bank. This is the reason for which the Romanian commercial banks, dropped gradually to maintain in their offer the credits with decreasing rates. For the moment this type of banking product can be accessed only from a few institutions in domain, unlike the previous years when it was included in all the offers. The explanation is quite simple: “The credits with decreasing rates are disadvantageous for banks from the point of view of profitability in comparison with the credits with flat rates,” says Anamaria Rotar, Chief Operatoring Officer within the credit broker Kiwi Finance.

The CREDIT TEAM representatives share the same opinion: “Usually, by comparing those two types of credits put at disposal by the same institution, it results the fact that for the credit with flat rates the final costs can be higher than in case of the decreasing rates”, sustains Gavrila, communication director at this credit broker. CREDIT TEAM representatives recognize that for the moment there are just a few banks that have in portfolio both variants of credits.

Advantages and disadvantages

As the cost difference can be observed with the naked eye, to a simple calculation of the sites of banks it is raised the question why do the Romanians access this type of credits if there are cheaper. The answer is that the applicant with smaller incomes wants a bigger credit. Here enters the promotion type small interest rates on short time, that is seriously helped by the flat rates.

Situation in which falls down the variant of some decreasing rates. “The credits with decreasing rates have constant the main (the monthly sum which has to be returned without interest rate) and the interest rate is applied to the balance. Customers’ advantage: smaller cost. During the entire period of the loan he pays accumulated a smaller value than in case of the credits with flat rates. Customers’ disadvantage: smaller loaned value. This is because the reimbursement capacity is calculated at the value of the first rate (which is the biggest) and the value of the credit which he can take is smaller than for loans with flat rates”, Anamaria Rotar added.

Being big, the first value covers the limit of the indebtedness level for a period. “Only, when the rate decreases, the customer can have access to a credit supplement”. But most of the times the need of money determines the customer to choose the credit”, Roxana Gavrila adds.

Calculation examples

CEC Bank is one of the banks that grants both type of loans. On the internet page of this bank, as otherwise at most of the ones that offer both types of products, there can be done also calculations regarding the final cost of the credit. So, for a mortgage loan of 70.000 euro, on 20 years, the final sum that has to be reimbursed is of 133.541 euro for the variant with decreasing rates (first rate is of 820 euro and the last of 214 euro) and of 151.723 euro for the flat rates (the monthly rate is of 632 euro). It results a gain of 18.182 euro. The contracted sum increases, the gain is bigger. For a credit of 150.000 euro taken in similar conditions the gain is over 38.000 euro. The indebtedness level accepted by CEC Bank to the credits in currency is between 35 and 70%.

BRD also offers both types of loans and the differences are not at all ignorable. So, in case of the product “Habitat imobiliar” to which it is compulsory an advance of 20%, for a loaned sum of 150.000 euro in case of the flat rates -1370 euro monthly, the final sum which must be paid being of 329.619 euro. The customer which chooses the decreasing rates will pay with 27.888 euro less after those 20 years. The indebtedness level accepted by this bank is of maximum 70%.

To the Romanian Commercial Bank (BCR), the final sum that can be known is just for the credits with flat rates, in case of the decreasing ones being possible just the calculation of the first rate. So, for the same credit of 150.000 euro on 20 years, the advance of 25% is compulsory and the maximum indebtedness level reaches to 70%, the first interest rate in case of the flat rates being of 1246 euro (299.040 euro at the end of the period of credit) and of 1567 euro for payments decreasing from a month to another.

Beyond the smaller cost of the variant with decreasing rates, there is a major advantage which the customers track only when they decide to reimburse the anticipated credit. It’s about the level of the interest rate in total of payment. If we take into account just the example of CEC Bank we can notice that for the variant with decreasing rates from the total of the first rate, respective 1756 euro, 625 is the credit and the rest is interest rate. For the other example, from the total of the rate of 1354 euro, 223 euro is the rate, that reaches to 600 euro only in the 140 month of credit and the rest is represented by interest rate. So, a person which will decide to pay back the credit after 5 years will have to pay, without the afferent commissions, 112.500 euro in case of the credit with decreasing rates and somewhere at 132.000 euro for the variant of credit with flat rates.

Others compulsory elements for that a credit to be more advantageous are a shorter reimbursement periods, variable interest rate, contracting the credit in currency and negotiation of the conditions of loaning, which should be stable.

Flat rates versus decreasing rates