Mortgage loan: What is the difference between APR and APRC?

TAN and APR: What do the acronyms mean?

First and foremost, you should know that APR and APRC are two types of interest rates applied to loans, not only for housing, but also personal, credit cards, among others.  

It is important to know what these rates mean, as they represent the amount of interest, that is, the cost of the loan, added to the installment you pay monthly to the bank.

The acronym TAN refers to Nominal Annual Rate, and the acronym APR stands for Effective Annual Interest Rate. But what does each one represent in mortgage credit, and what is the difference between them?

What does APR represent in housing credit?  

The Nominal Annual Rate (NAR) represents the value of the interest rate added to the total amount of credit. Its percentage results from the sum of the index (Euribor in the case of a variable rate), with the spread. In the case of a fixed rate, it corresponds to the sum of the contracted fixed rate with the spread.

In essence, the APR translates to the cost we are having when contracting the credit in question. This is a mandatory rate for all credits and lasts for one year. Therefore, the APR is calculated using the following formula:  

Loan amount x Annual Nominal Interest Rate Percentage of 12 months.

Therefore, in a loan of 200,000 euros and an APR of 3%, the amount of interest would be:  

200,000 x 0.03/12 = 500 euros

However, when comparing the conditions of various banking proposals, keep in mind that having a lower APR does not equate to cheaper credit. This is because the APR does not include charges associated with housing credit that should also be taken into account. In other words, lower interest rates do not mean it is the option in which you will save the most. Therefore, we must also analyze the APR.

What differs between APR and TAE?  

The Annual Percentage Rate represents the total cost of the loan, including interest and charges. It is the sum of the total interest with the total charges associated with the credit, such as taxes, commissions, required insurance, records, among others.

Therefore, it is the APR that demonstrates the total cost of credit to the consumer, so it is one of the values that should be looked at when comparing proposals between banks.

The calculation of the APR is done the same way, by multiplying the loan amount by the interest rate percentage, then dividing by 12 months.

What is the impact of APR and EAR in practice?  

In practice, let's look at an example comparing two banking proposals to understand the difference between the impact of APR and APRC on a mortgage. In a loan of 200,000 euros, Bank A proposes an APR of 3%, and Bank B makes a proposal with an APR of 4%. Not being informed about the impact of this rate on credit, initially, you would think that the proposal with the lower APR made more sense.

However, considering that bank A proposes an APR of 4.5%, and bank B a proposal of an APR of 4.2%, the scenario changes. Through calculations, it is possible to realize that, in this case, the proposal with the higher APR is the most compensatory. This is because, only considering the APR, in bank A you would pay 500 euros in interest, while in bank B you would pay 666.7 euros. But if we analyze the overall rates, the APR, in bank A the interest amounts to 750 euros, and in bank B to 700 euros:

That is, even with a lower APR, in bank B they would be paying 50 euros less in interest, taking into account the charges associated with the credit.

Therefore, it is essential to evaluate the APR as a comparison reference between credit proposals, to make an overall assessment of the cost we will have when taking out the loan.  

To avoid doubts, you can always ask for help from a credit intermediary, such as Poupança no Minuto, through completely free services. This way, you can ensure assistance throughout the entire credit contracting process in a quick and simple way.