There are times when we can confuse financial terms, not on purpose, but thinking that they are two concepts that mean the same thing or that they are misinterpreted (despite being very important). That is what happens to the TIN and the APR.
If you would like to really know what the TIN and the APR are, the differences between these two concepts, and learn why they are so important and you should take them into account, then this article will help you to have the concepts much clearer.
What is the TIN
When it comes to understanding these concepts, you must bear in mind that we are talking about two concepts that are used, especially when valuing and / or requesting a loan. That is why they are so important, since many tend to get confused, or not give them the importance they have. Therefore, you have to know very well what each term refers to.
In this case, the TIN is the acronyms that encompass the Nominal Interest Rate. In the words of the Bank of Spain, the TIN is conceptualized as "When the period of time foreseen for the calculation and settlement of interest coincides with the form of expression of the interest rate, a nominal interest rate is being used".
However, this definition does not explain very well what this term refers to. For you to understand, The TIN is the money that someone who leaves you part of their capital temporarily will ask you "for more." For example, in the case of a bank, it will be the interest that it will put you for lending you money and that you will have to return along with the rest of the money it has lent you.
This concept always has to do with a period of time (if not specified, then the period of time is annual). Normally, it is a fixed percentage that is agreed with who is going to lend the money, in such a way that you know exactly that, if you ask for 100 euros, you will have to return 100 + the TIN (which can be 5 euros, 2, 18…).
How to calculate the TIN
Calculating the TIN is quite easy and does not involve any problems. Therefore, we explain it to you with an example. Imagine that you are going to ask for 100 euros (to put it easy) and the bank tells you that, for that reason, it is going to charge you 25% of the TIN (without specifying a period of time). This means that 25% will be annual. That is, you will have to return 100 + 25%, which would be 125 euros.
However, per month you are not going to pay what corresponds to you (8,33 euros) plus 25% of the TIN, but this must be divided into 12 monthly payments (the year), which leaves you a figure of 8,33 , 2,08 euros (loan) + XNUMX (TIN).
In reality, banks calculate the TIN with a formula, in order to later put it to the products they offer. This is:
TIN = Euribor + differential (this is the one applied by the bank). This is what will lead to the "effective cost of the product", that is, what you have to put "extra" apart from what you ask for.
What is APR
The APR is actually the Annual Equivalent Rate, a much "richer" term, since it includes many other data (more than the TIN). According to the Bank of Spain, the definition given on this index is as follows: «The APR is an indicator that, in the form of an annual percentage, reveals the effective cost or return of a financial product, since it includes interest and bank charges and fees. In other words, it differs from the interest rate in that it does not include expenses or commissions; only the compensation received by the owner of the money for giving it away temporarily.
In other words, the APR is actually the effective cost of the loan, seen from a percentage of the capital borrowed In addition, it includes not only the interest that is applied, but also the term, commissions and expenses generated from that loan. That is why he is told to give more information about it.
The APR is present in both savings products and loan products, and in both it does the same thing, that is, it includes not only the nominal interest, but also commissions and expenses that are related to the operation to be carried out.
How the APR is calculated
As for the mathematical formula to calculate the APR, this is somewhat more complex than with the TIN. But if you want to try, here we leave it for you:
APR = (1 + r / f)f-1
In this formula, r would be the nominal interest rate (but expressed in terms of one), while f is the frequency (period), if it is annual, quarterly, monthly ...
What are the differences between TIN and APR
Now that you have a bit clearer about the concepts, you may be wondering about the differences between the two, since, until now, you only know that the TIN is a term that gives less data than the APR.
The Bank of Spain itself obliged entities that, since 1990, all financial entities had to publish the APR in their product offers that used it, in order to provide all the information that a person must take into account before taking a decision.
But, is there so much difference between the TIN and the APR? Let's see it:
The way to calculate it
As you can see, the way to calculate the TIN and the APR are totally different. Not only because of the mathematical formula that may be more or less complex, but because more concepts are reflected in the APR than in the TIN. Therefore, everything must be reflected in the calculation of this, providing at the same time, more data (and giving a global vision).
Information
The TIN, due to its «simple» concept, is actually an informative index, since it does not reflect the reality of the banking product itself. This only expresses an indicator, but not everything else that influences the final result, such as expenses and commissions, something that the APR does. Hence, when it comes to banking products, it is the one that really matters to us.