You might have heard the old saying, “there’s no such thing as a free lunch.” And while this may not prove true in all walks of life, when it comes to taking out loans, there’s likely no bank on the planet who will offer you one without charging interest.
Simply defined, interest is the money we pay someone—say, a bank—in order to borrow “their” money. The “price” we pay for this money is called the interest rate. Both types of interest rates are validated by the Bank of Spain: TIN—Tipo de Interés Nominal—and TAE— La Tasa Anual Equivalente. TIN, similar to a Nominal Interest Rate in English, is the fixed cost you pay in return for the money you borrow as agreed upon with your bank. TAE, on the other hand, is used to compare the actual cost of multiple loans. It includes bank fees, the loan term, and the loan’s TIN itself.
If you’re considering applying for credit, opening a savings account, or simply want to know more about mortgages, personal loans, or consumer loans, you’re in the right place! So settle in and get ready to learn more about the key features of these two interest rates, their main differences, and the various types of loans on the market.
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What is a TIN?
The Tipo de Interés Nominal is the percentage a bank charges for lending money to their customers. It represents the actual cost of their loan over a certain period of time. However, this percentage doesn’t include fees or variable costs related to the repayment dates for the money borrowed. In a variable-rate mortgage, for example, banks calculate the monthly TIN by adding the Euribor rate to the bank’s differential rate.
What is a TAE?
The La Tasa Anual Equivalente is used to quantify the true cost or yield of a particular loan. It’s calculated by adding up the loan’s TIN, the frequency of payments (which could be weekly, bi-monthly, monthly, quarterly, or annually), bank fees, and other costs related to the loan. It doesn’t factor in any fees the bank could charge after you take out a mortgage.
The differences between TIN and TAE
As we’ve mentioned, in Spain, a TIN is an interest rate agreed upon between the bank and customer taking out the loan. Conversely, the TAE, helps customers gauge the entire cost independently of the loan’s terms. It’s calculated by taking into account variables like the number of installments, the bank's fees, the loan’s TIN, and cancellation or early repayment charges. This means that customers looking to take out a loan will need to consider the TIN amount of their loan to understand their loan’s interest rate, while also understanding how much their loan will cost altogether.
Types of loans available in Spain
Now that we’ve covered the two types of interest, let’s look at the different types of loans available to customers in the Spanish market:
Mortgages: This kind of loan is taken out by the customer to purchase a piece of real-estate such as a house, a business, or a piece of land. The repayment term tends to vary between 15 and 30 years, and may have a fixed, variable, or mixed interest rate depending on the contract.
Student loans: While not so common in Spain, taking out student loans is very much the norm in the United States and the UK. Students who can’t get a study abroad scholarship can apply for a student loan to study elsewhere, or can use them to help fund their Bachelor’s, Master’s, or postgraduate degrees.
Personal loans: These loans are common, and are used to finance specific purchases related to travel, renovations, and even weddings.
Consumer loans: This type of loan is used for buying goods like vehicles, computers, furniture, and appliances.
We know how easy it is to get lost in financial jargon. So, if you’re contemplating taking out your first loan, we’ve put together a glossary of all the most important terms to help you out.
Financial products: Money-related products you can use to save and invest.
Fixed interest rate: An interest rate that is pre-agreed-upon with a bank and doesn’t vary based on the market.
Variable interest rate: This type of interest rate either increases or decreases depending on the market. Here, the borrower and the lender agree to regularly revise the interest rate—normally once or twice per year—based on the Euribor or LIBOR.
Mixed interest rate: An interest rate for a financial product comprised of both a fixed and variable rate.
Euribor: This is the interest rate Eurozone banks apply to money they lend each other.
LIBOR: The London InterBank Offered Rate (LIBOR) is the UK equivalent of Euribor.
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What is the TIN interest rate and how is it calculated?
All loans have a TIN. This interest rate is agreed by the borrower and the bank. In fact, it’s quite easy to calculate—if you ask your bank for a loan of €5,000 with a repayment term of one year and a TIN of 18%, simply multiply the amount borrowed by the percentage of the loan, then divide the result by 100 (5,000 x 18 / 100 = 900). This gives you an annual nominal interest rate of €900.
What does a 5% TAE mean?
Unlike a TIN, a TAE interest rate includes costs like fees and nominal interest, and constitutes the actual amount of money you’ll pay for a loan. For example, with a loan of €1,000 and a TAE of 5%, the borrower needs to pay €50 (1,000 x 0.05 = 50).
Which interest rate do I actually pay—TIN or TAE?
When you repay a loan, the TAE is the actual amount you’ll pay. The TIN is part of TAE, and does not include extra fees and charges.