What is the APR and the NIR and what are their main differences?
Surely at the time of contracting a mortgage loan for any house, such as one on the Costa del Sol, you have come across the terms NIR and APR. It may be that these two acronyms were out of your reach and you were unaware of their meaning and therefore, their importance when choosing a financial product. Therefore, in this article we are going to explain in a simple way what these concepts are, how they differ and which is the best option.
Before starting with the explanation, it is important to clarify that if you are evaluating several real estate offers, you should not only look at the NIR, but go further and focus on the APR. Now, let’s start with its clarification.
NIR, Nominal Interest Rate
The Nominal Interest Rate refers to the fixed percentage that must be paid to the bank for having lent us a certain amount of money. This reflects the exact amount that we have to pay back to the bank for having made the loan to us. However, it only includes the monthly interest and does not include other extra costs associated with the operation.
It indicates the percentage that corresponds to the bank and is calculated by adding the Euribor (a reference index published daily that reflects the average interest that European banks face after lending money to each other in the short term and then granting loans to third parties) to the differential (the difference in price that a bank pays to obtain funds and charges for lending them to its customers) established by the bank. In other words:
NIR = Euribor + spread (%).
APR, Annual Percentage Rate
The Annual Percentage Rate is the actual amount you are going to have to pay your financial institution for the money it has granted you over a period of time. This concept includes extra costs such as the interest rate of the commissions or the term of the operation.
This percentage is known annually and is applied to fixed-rate loans and not to variable-rate loans.
Although it includes extra costs, there are certain concepts that are not included, such as third party costs (insurance and guarantees) that the customer has to pay for himself.
As stated by Banco Bilbao Vizcaya Argentaria (BBVA), the APR is calculated using a mathematical formula that takes into account the nominal interest rate of the operation (NIR), the frequency of payments (monthly, quarterly, etc.), the bank commissions for cancellation or amortisation, and the expenses of the operation.
Differences between the NIR and the APR
Although both are official concepts set out by the Bank of Spain, there are some differences between them.
- The Nominal Interest Rate (NIR) establishes the percentage that must be paid back to the bank each month after having been granted a loan. It shows the amount that corresponds to the financial entity, but unlike the Annual Percentage Rate (APR), this one shows the total and exact amount, taking into account the extra costs.
- The NIR is a monthly period and the APR is annual.
- The APR provides purely informative information and does not include fees and commissions. The APR provides more comprehensive and accurate information.
What is more important for the consumer?
The truth is that the Annual Percentage Rate is more important for the consumer as it includes the Nominal Interest Rate itself but added to other data that provide a clearer awareness of what a loan is going to cost or what an investment is going to provide. Therefore, the APR is what consumers are really interested in to know if what the bank is offering them has good conditions and thus be able to evaluate different offers.
