The interest rate depends on the amount of loan/deposit, maturity of the loan/deposit, the level of the agreed interest rate and method of interest rate calculation used by a credit institution. It is usually calculated using the interest rate on the amount of funds granted or deposited. There are several different methods of interest rate calculation. The level of interest rate depends on the type of loan or deposit, loan/deposit maturity, competition, inflation rate, the country's credit rating, etc. Interest rates may be fixed or variable. When considering a loan agreement, attention should also be paid to the difference between the nominal and effective interest rates as well as interim and default interest rates.
IMPORTANT:
Regardless of whether it is a loan or a deposit/savings deposit, a vital piece of information is whether a fixed or variable interest rate is applied to the specific type of loan or deposit. In general, fixed interest rates are safer as they remain the same throughout the life of the agreement, but the downside of these interest rates is that credit institutions generally offer higher fixed than variable interest rates. By contrast, the interest rate agreed as variable may change throughout the life of the agreement depending on developments in variability parameters and, its potential increase has a direct impact on your obligations under a loan, or in the case of your deposits, a decrease in the agreed variable interest rate will result in lower interest earned than expected. Therefore, it is very important, especially in the case of loans, that you avoid maximum borrowing that you, at the time of negotiating a loan, estimate you can pay since any subsequent negative change in your financial condition may threaten your regular loan repayments and face you with the risk of default interest and termination of the loan agreement by the bank.
Interest rate types
Nominal interest rate – the key interest rate for interest calculation, typically shown as the annual interest rate which has to be recalculated for shorter periods; it is agreed either as a fixed or a variable interest rate.
Interim interest rate − this rate is used to calculate and charge interest payable from the moment a loan is granted until the first loan annuity/instalment payment. Where a credit institution charges an interim interest rate, before concluding an agreement, the consumer is advised to check the best timing for the advancement of the loan so as to minimise the interim interest rate.
Effective interest rate (EIR) – a uniform method of showing the interest rate aimed at improving transparency and allowing easier comparison of the terms and conditions for granting the loan/making deposits between all credit institutions and credit unions. In addition to the nominal interest rate, the calculation of this interest rate also includes fees charged when a loan is granted or a deposit made and as such this interest rate gives a more accurate presentation of the total price of a loan/deposit. The EIR provides more comprehensive information based on which a comparison can be made between individual offers so as to reach a decision on the interest rate best suited to your capabilities and expectations.
IMPORTANT:
The following is not included in the calculation of EIR on loans:
- public notary fees;
- default interest or any other charges incurred as a result of the borrower's default on loan agreement terms and conditions;
- postage, telegram and telefax charges.
Default interest rate − charged on the amount of due unpaid liabilities under your loan agreement.
Interest calculation
Interest may be calculated by applying the simple or compound interest calculation method. Irrespective of the interest calculation method, interest may be calculated and paid at the end of period or at the beginning of period.
Interest rate restriction
Restrictions on maximum interest rates on consumer loans are laid down in the Consumer Credit Act (Articles 11b, 11c and 20a), the Act on Consumer Housing Loans (Articles 17 and 25) and the Civil Obligations Act (Article 26).
Banks and consumers have no influence on interest rate restrictions as they are calculated based on prescribed rules and are valid for a period of six months, i.e., from 1 January to 30 June and from 1 July to 31 December of the current year.
The table below shows the currently valid restrictions on maximum interest rates to be applied when concluding a loan agreement in the period of restriction application. The restrictions also apply to previously agreed variable interest rates. Using this information, consumers can check whether the interest rate (nominal and effective) that they plan to agree upon or that they agreed upon during the conclusion of the agreement in the specified period is within statutory limits.
