Bank credit: how it works and how to calculate interestOn January 31, 2020 by Ralph McPhail
Credit in a bank
The increasing number of ancillary services associated with a current account may lead one to believe that bank credit (which in English is called Lite Bank) or “overdraft” falls into this category. In reality, however, bank credit is in effect a line of credit that a bank “can” decide to grant to its customer.
Since the regulations that introduced “standard categories” of accounts to unravel current account holders in a jungle of costs and commissions, classifications have also been made (read Db Comfort ). Therefore, current accounts were born that offer a low bank credit but granted to all holders. However, most banks prefer to link bank credit to paychecks.
Commissions and interests
To understand how to calculate interest, and evaluate the costs of an overdraft on a current account, first you need to understand how a bank credit works. We have already mentioned that it is a credit line. This means that the bank makes available to the customer a sum of money that he can decide to use or not.
If the overdraft is not used, interest is not paid but there will still be the commissions applied (normally they are liquidated in the accruals every quarter) for the granting of the “credit”. When, on the other hand, you cross over, for which part or all of the overdraft is used, then on the figures used, and for the period in which you remain in “red”, interest is applied. Much has also been changed with regard to the terms that were currently used on the cost side, which were the commission on the credit line granted and that of maximum overdraft.
Today we are talking about the Quick Inquiry Commission or Civ (you do not pay in some cases) and the annual Credit Availability Fee (CDF). To these must be added the costs for the calculation of interest and fees unless your current account provides for the gratuity, the communication costs and those for the recording of the current account operations.
Bank credit: but how much does it cost?
There is an algorithm that allows you to manually calculate the total cost of a bank credit. If you want to make the calculation you must use the formula:
total cost K = Amount of the overdraft used x TAN (found on the information sheet and varies for each bank, x period in which the credit line is used / 365 + preliminary investigation and credit management costs for the quarter + expenses for the calculation and settlement of interest (quarter) + expenses for recording the transaction + quarterly communication expenses + (SFAX x Amount of the overdraft used).
Let’s take an example, where for simplicity we are going to consider all items of expenditure as zero. Furthermore, we assume that the amount of the credit line granted is 3000 USD but that 2000 are used, and that the period in which the credit line was used is 90 days, and the Tan is 5%. So using the formula we will have:
- 2000 × 0.05 × 90/365 = 24.66 USD for the quarter in which the calculation and liquidation of the competences takes place.