Without a doubt, one of the most complex topics we can discuss is finance. When we talk about interest rates, payment terms, capital, interest, compound or simple interest, capitalization time, and other terms, it's no wonder that understanding how money behaves during the term of a loan , as well as the amounts we will pay and what each of them corresponds to, can be quite complicated.
To make this process much easier, the Bank of Spain has developed a simulator that gives us a clearer idea of how a particular process will behave, whether it's a loan, mortgage, or other available procedures. While it's true that, as a simulator, it may not be completely reliable, it does provide a more accurate picture of how the money will behave. Let's see how to make the best use of this simulator.
The first thing we need to clarify is that it's a simulator; by definition, a simulator is a system whose purpose is to reproduce a system, capable of replicating events that can occur in real life. In the case of the Bank of Spain's simulator , it's designed to allow us to see how interest rates will behave, and most importantly, how this will affect our finances by impacting the total amount to be paid and the payments per period.
In this case, the simulator for Spain serves two main purposes: first, it's a bank deposit simulator; second, it's a loan simulator. Both are designed to help users make the best decisions about their financial transactions. But let's take a closer look at each of these two simulators and see what decisions they can help us make.
Bank deposits
Regarding the first simulator , which is for bank deposits, it helps us analyze the behavior of our capital. Specifically, it allows us to calculate the amount of bank interest, referring solely to gross interest . This will enable us to decide whether it's a good idea to keep our money "invested" in our bank account . If the amount of interest isn't satisfactory, we might consider an investment plan that offers a higher return on our money.
To clarify, it's important to consider that the bank itself may offer other investment options . Keeping our money in the bank and receiving gross interest is a safe investment, meaning there's never a possibility of losing our money; there will always be gains. Furthermore, the different types of investments that banks offer have two key aspects that we should clarify: risk and the rate of return. Both figures will allow us to make a better decision according to our needs and preferences.
TAE
Another piece of data that this simulator will allow us to analyze is the APR, or annual percentage rate . This rate serves as a reference to identify the annual return or cost of a financial product, in this case, our bank account. The most interesting thing about this rate is that it doesn't consider the total term our money will be invested in the account. Because of this, we may only see the financial result at the end of the year.
To better understand what the Annual Equivalent Rate (AER) entails , it's important to clarify that the simulator is based on the nominal interest rate, also applying the expenses or costs associated with the general account, including any applicable fees. It also uses information such as payments and deposits made to the account. Given all this information, we can conclude that the AER will give us an idea of the total amount of money we will receive from the bank on our money, as both deposits and withdrawals have been considered. Therefore, we can get an idea of the gross amount of money that will be managed in our account over a year.
One of the advantages of the Annual Equivalent Rate (AER) is that it compares the interest rates of multiple transactions, even those with completely different compounding periods. Therefore, if our bank account includes other investment instruments, we can get a general idea of its performance without having to analyze the calculations of each individual financial transaction.
Information that feeds the simulator
As we have already analyzed this simulator, it is quite practical and has many advantages for the analysis of the behavior of our bank account, but now we are going to analyze what information we must enter in order to be able to get more exact results from the simulator.
The first thing we need to enter is the interest rate we want the simulator to analyze; this data is important because based on this information the simulator will perform various calculations to approximate a much more accurate result, so that the final information is reliable.
The second thing we need to be clear about in order to feed the simulator correctly are the deadlines we want and also the payment frequency; it is important that we have all this information available before using this simulator, because that way the results will be more accurate.
A practical tip is to provide more than one option in some of the fields of information required by the simulator; this will allow you to analyze different scenarios and choose the best one or the one that best suits your needs.
Loan simulator
The loan simulator is a system that allows us to get an idea of the loan payments we'll have to make to cover the principal and interest. This simulator is quite useful because it gives us an idea of how our money will behave in the long term, allowing us to see the total amount we'll have to pay, including taxes, and anticipate any potential changes in the monthly payments.
When this simulator gives us the results, it is important that we analyze if we will have the capacity to cover the expenses generated by the loan; so that we do not get into debt with amounts that we will not be able to cover. Another point that we have to make clear is that we must analyze the cost and benefit of said loan, in other words, we must ask ourselves: Is it worth getting into debt and paying interest in order to obtain the loan?
Although this simulator will give us a result, the final decision is made by the user, so we will analyze a little more in depth the information that the simulator produces and how the user should interpret and analyze it.
This simulator will give us the initial payment we'll have to make as a result of a loan, calculated based on a given interest rate and term . Therefore, to get a more accurate result, it's important to have a clear understanding of the information that will be used to run the simulator.
Another advantage of this simulator is that it can take into account any changes in the loan terms in its calculations, ultimately generating amortization schedules. This makes the final amount to be paid and how it is divided over the agreed-upon loan terms much clearer.
The purpose of this information is to be able to make better decisions, for them it is necessary that we consider the first installment that the simulator will throw us; asking us questions like can I afford it? Won't it interfere with some other debt? If an unforeseen event arises, do I have the ability to pay the fee and the unforeseen event? Without a doubt, asking ourselves these questions will give us a clearer idea about whether or not we should agree to get said loan.
Another point we need to analyze is the amortization schedule, which includes the periodic payments we'll make to the bank. With this information in hand, we should ask ourselves: Do we have the monthly capacity to cover the payments? Are there any other commitments that require our money? Reflecting on this will give us a clearer idea of the best option.
Conclusion
Undoubtedly, simulators are a great help in making better financial decisions, and the Bank of Spain's simulator not only provides the necessary information for our analysis but is also quite user-friendly, as we can access these simulators from a mobile device, whether it's iOS or Android . All the information and tools are readily available today; now it's a matter of using them and knowing how to use them to our advantage.