Original title: The Central Bank clarifies the calculation method of annual loan interest rate! Will the overall lending rate decline?
For the first time, the Central Bank requires that the annual interest rate of loans be explicitly stated!
The People's Bank of China has recently released an announcement clearly stating that all institutions engaged in loan business and all loan products should clearly indicate the annual loan interest rate, and the loan cost should include interest and various fees directly related to the loan, encouraging private lending to follow suit.
Yu Baicheng, president of the Zero One Research Institute, told the International Financial News that the loan market has been plagued by chaos in recent years, and the different interest rate standards and opacity are also among the problems. There is a dispute in the industry as to whether the nominal interest rate (APR) or the internal rate of return (IRR) is used to calculate the interest rate of amortization loan products. This announcement clarifies the calculation method of annual loan interest rate for the first time, which will promote the further decline of the overall lending interest rate, and the competition among borrowing institutions will be more intense.
The loan product shall indicate the annualized interest rate
According to Announcement [2021] No. 3 of the People's Bank of China, all institutions engaged in the loan business should show the annual interest rate to the borrower in an obvious way when marketing through websites, mobile applications, promotional posters and other channels, and specify it when signing the loan contract, or display daily interest rate, monthly interest rate and other information as needed, But it should not be more obvious than the annualized interest rate.
Among them, institutions engaged in loan business include but are not limited to deposit financial institutions, auto finance companies, consumer finance companies, microfinance companies, and Internet platforms that provide advertising or display platforms for loan business. The annualized loan interest rate shall be calculated based on the proportion of all loan costs charged to the borrower and the loan principal actually occupied, and converted into annualized form.
The announcement clearly stated that the loan cost should include interest and various fees directly related to the loan. The principal of the loan shall be stated in the loan contract or other creditor's rights certificates. If the principal is repaid by installments, the actual occupied loan principal shall be calculated based on the remaining principal after each repayment.
The announcement also pointed out that the annual interest rate of loans can be calculated by compound interest or simple interest method. The calculation method of compound interest is the internal rate of return (IRR) method. If the calculation method of simple interest is adopted, it shall be explained that it is simple interest.
Example of IRR method for calculating loan annualized interest rate
The central bank also gave an example of the IRR method to calculate the annualized interest rate of loans. The more fair way to calculate the annualized interest rate of loans is to calculate the annualized internal rate of return (IRR) based on the borrower's loan principal, repayment amount in each period, number of loan periods and other factors, taking into account compound interest. The calculation formula is:
(n is the repayment frequency within the year (for example, monthly repayment is 12, every three months repayment is 4, and annual repayment is 1), T is the number of repayment years, and the calculated IRR is the annualized interest rate)
Specifically, 1) one-time repayment of principal and interest at maturity
The borrower shall repay the loan principal and pay interest in a lump sum on the maturity date of the loan. For example, for a loan product, the term is 2 years, the principal is 100000 yuan, and the borrower will repay the principal and interest of 110000 yuan in a lump sum after 2 years. The annual interest rate of the above loans is about 4.88%, and the calculation process is as follows:
2) Amortization products
During the repayment period, the borrower shall repay a certain amount of principal in each period, and pay the interest generated by the actually occupied principal in that period. For example, commercial personal housing loans that are repaid in equal principal and interest or equal principal installments. For example, a personal housing loan, with a term of 20 years, will be repaid monthly for 240 periods, with a principal of 1 million yuan and equal principal and interest. According to the repayment plan, from the end of the first month after the loan, the borrower will repay the principal and interest of 6599.6 yuan in equal amount every month. The annual interest rate of the above loans calculated in simple interest is about 5%. The annualized interest rate calculated by IRR method is about 5.12%, and the calculation process is as follows:
3) Charged products
The borrower shall pay the service charge and other fees directly related to the loan in a lump sum in the current period of the loan, and repay a certain amount of principal and expenses in installments during the repayment period. For example, a consumer finance company has a loan with a term of one year, monthly repayment, a total of 12 installments, and a principal of 100000 yuan. According to the repayment plan, the borrower pays a one-time service fee of 1000 yuan in the current period of the loan, and repays 8833.3 yuan in equal amount every month from the end of the first month after the loan, of which the principal is 100000/12=8333.3 yuan, and the installment fee (calculated at 0.5% of the initial loan principal) is 100000 * 0.5%=500 yuan. The comprehensive annual interest rate of the above loans calculated in simple interest is about 12.8%. The comprehensive annualized interest rate calculated by IRR method is about 13.58%, and the calculation process is as follows:
Or promote the downward trend of overall borrowing utilization
"This announcement requires all lending institutions, including the cooperative Internet platform, to express the annual interest rate of loans, and for the first time defines the calculation method of the annual interest rate of loans. This will play a very obvious role in improving the transparency of the loan market, protecting the legitimate rights and interests of financial consumers, and will also have a very significant impact on the loan industry." Yu Baicheng said.
Yu Baicheng pointed out that there are also disputes in the industry about the calculation method of interest rates for installment loan products. Some use the nominal interest rate (APR), and some use the internal rate of return (IRR). Generally speaking, the standard of IRR is more stringent. On the basis of transparency of interest rate information, borrowers will pay more attention to and have more contrast with interest rates. Among similar products, products with high interest rates will be greatly affected. This measure will also promote the further decline of the overall lending rate, and the competition among borrowing institutions will be more intense.
In the opinion of Su Xiaorui, a consumer finance expert, this announcement is an important measure to strengthen the management of Internet loan business. Previously, some financial institutions and Internet platforms did not disclose or less disclosed loan interest rates or there was inducement in the process of business expansion, which is suspected of infringing the legitimate rights and interests of financial consumers, and is not conducive to the healthy development of the consumer financial market.
"The announcement proposed that 'loan cost should include interest and various fees directly related to the loan', and included service fees in the example, which can effectively prevent financial institutions from charging various fees in disguised form in various names, increasing the hidden costs of borrowers." Su Xiaorui told the International Financial News that the document noted that costs were calculated in the form of IRR, It also gives two kinds of schemes, namely, one-time repayment of principal and interest and installment repayment, which can not only unify the calculation method of loan interest rate, but also provide an effective reference for institutions in subsequent practice. However, as the document pointed out that "the annual interest rate of loans can be calculated by compound interest or simple interest method", it remains to be seen whether the successor institutions will use IRR instead of APR for disclosure.
Su Xiaorui pointed out that the purpose of the regulatory action is to unify the disclosure method of loan interest rate from the financial marketing publicity link, which can not only curb the vicious competition of financial institutions by taking advantage of the loopholes of improper publicity, but also protect the right of financial consumers to know, which is conducive to promoting healthy competition in the consumer financial market in the long run.
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Editor in charge: Dai Jingjing
