All expenses incurred by a borrower are taken into consideration in calculation of actual annual interest rate (AAIR).
Determination of EAR (Effective Annual Rate) for the purposes of advertising and informing customers on credit products.
1) Which assumptions should be taken into account in the calculation of EAR on credit products related to credit cards (lines)?
- Calculations on credit cards (lines) are implemented taking into account the followings:
I. When loan agreement enables borrower to freely act on the use of credit, it should be taken into consideration to use credit in its full amount from the effective date of agreement;
II. When free act on the use of credit is determined in the loan agreement and different interest rate and commission request is required on this basis, calculation should be implemented taking into account the highest demands;
III. Unless borrower’s payment schedule on loan agreement is not envisaged, the followings should be assumed:
- credit term being one year;
- implementation of payments on a monthly basis and in equal payments.
IV. When only term is defined in payment schedule on loan agreement and the amount of payments are free (that is not defined on agreement), it should be assumed that the minimum payments (only interest payments) will be made and principal amount will be paid at the end of the term.
2) How should general EAR be calculated if bank applies different commissions (cashing, insurance etc. commission costs) depending on the rating of borrowers, documents submitted by them, type of guarantee, belonging to corporative group and other features?
- In this case, calculation is implemented taking into account the highest commission costs to be applied.
3) How should bank take into account the insurance and other costs specified in the agreement (which exact amount is not known)?
- When bank requires from borrower to apply to a specific organization providing insurance, assessment and other similar services and these service fees are known to bank beforehand, the amount of those costs should be taken into account in the calculation of EAR;
- When bank requires from borrower to insure the mortgaged property by any insurance organization and the amount of insurance costs (or costs on other similar services) is known to it, in this case, it should take into account those cots in the calculation of EAR. At the same time, it should inform borrower about additional costs and relevant clause about this matter should be added to loan agreement.
4) Should EAR be used if credit product offered by the bank covers any interval as an amount and term (for example, credit amount from 300 AZN to 5000 AZN, and term from 3 months up to 36 months)?
- The highest EAR calculated on credit product should be given. In addition, the possibility of the application of the lowest EAR depending on the term and amount of credit can be indicated.
- EAR calculated on the product should be indicated in table on website (example).
|Nominal rate of interest||22%|
|Commission||5% up to 12 months, 6% over than 12 months|
|3 months||36 months|
|5000 AZN||55.4%|| 26.8%
5) Should nominal rates of interest be noted along with EAR for advertising purposes?
- No, it is not required to show nominal rates of interest together with EAR in advertising means. However, nominal rate of interest should be noted along with EAR in the description of credit products given on the website, loan agreement concluded on the specific loan procedures and sub-section of the website dedicated to EAR.