The effective annual interest rate (EAIR) is one of the most important elements of the lending agreement. This indicator is useful when comparing a number of loan options as it presents all the payments in one digit, as an annual percentage of the value of the loan. The information about the EAIR, which is applicable to all the loan products, is published by the National Bank of Moldova in the context of the information campaign launched together with the National Commission for Financial Markets as part of the financial education project “Learn. Give sense to money”, IPN reports.
Willing to attract clients, the institutions that provide loans distribute commercials presenting different costs of a loan. For example, if the person wants to take out a loan of 1,000 lei for a year by starting to repay it the next month, the options are the following: monthly payment of 100 lei (EAIR = 42%); annual interest rate of 10% without any commission (EAIR = 10.47%) or interest rate of 0% with a monthly administration commission of 2% (EAIR = 26.8%). It’s normal for a person to want the loan whose total cost is the lowest for the whole period.
To be able to compare a number of loan options, one can use the calculated EAIR that includes all the payments made for a loan expressed as an annual percentage of the value of the loan. In the hypothetical situation presented above, the second option has the lowest EAIR and is thus the most convenient one. So, the EAIR is the most efficient instrument for comparing the products of different lenders.
The law obliges those who advertise loans to include the EAIR every time they present data about the total cost of the loan. Before signing the lending agreement, the lender is obliged to communicate the EAIR, which should not be mixed up with the interest rate as the two play different roles in bank and nonbank lending.
The persons who are familiarized with the financial system less can easier walk into the trap of too expensive loans or loans that do not meet the needs. The loan with the lowest EAIR is the product with the lowest cost.
The materials within the campaign will be broadcast during two months and will be available on the websites of the institutions involved in the information effort.
