In order to attract customers, the institutions that want to lend us money to advertise the different costs of a loan. Suppose we want to take a loan of 1,000 lei for one year with the start of the repayment from the second month. How to choose from the following offers:
- Monthly payment of 100 lei (DAE = 42%);
- 10% annual interest, without other commissions (DAE = 10.47%);
- 0% interest with 2% monthly administration fee (DAE = 26.8%).
It is natural for each of us to want the credit whose total cost is the lowest for the whole period. But how do we decide when the offers are presented differently …?
What is DAE?
In order to be able to compare more offers of credit, the calculation of the Effective Annual Interest Rate (DAE) is used. This includes all payments we make for a loan expressed as an annual percentage of the loan amount. In the hypothetical situation presented above, the second offer would have the smallest DAE, being the most convenient.
So, in order not to get lost among the offers and to avoid getting rid of other fees and fees related to the loan, we must look at the DAE – the most efficient tool for comparing products from different creditors.
How do we know how much DAE is?
DAE is applicable to all credit products – consumer loans, non-bank loans, mortgages, leasing or credit cards. The law obliges those who advertise on loans to include DAE whenever they present data regarding the total cost of the loan.
Moreover, before we sign the loan agreement, the creditor is obliged to let us know what DAE is. We do not have to confuse the DAE with the interest rate, because they have different roles in the context of bank loans and non-bank loans.
The interest rate is used to calculate the interest rate while the DAE is an indicator that expresses as a percentage of the total cost of the loan/loan.
What to watch out for
As the DAE level affects credit consumers, it is our responsibility to request this information when it is not communicated to us, we do not find it or it is missing from the contract. Moreover, if we consider that we do not have the necessary knowledge to choose the best credit, it would be good to call a friend or relative who can help us.
People less familiar with the easiest financial system can fall into the line of loans that are too expensive or do not meet their needs. We must bear in mind that the credit with the lowest DAE is the product that costs the least. At the same time, when comparing the offers, we must choose similar products by volume and loan period, otherwise, DAE may not help us anymore.