# What is the “cost of a loan”?

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When you take out a loan, you first have in mind the amount you need. 3,000, 5,000 or 10,000 \$ for a consumer loan? 150,000, 200,000, 300,000 \$ for a property purchase? But this sum is not the only one to have in mind. It is in fact supplemented by fees and interest at a rate fixed by your bank. The whole will be divided into monthly payments to be reimbursed.

If the principle seems simple, the reality is actually much more complicated. Between simple and compound interest, administration fees and insurance, calculating the cost of a loan requires taking into account many parameters and carefully reading your contract. A loan ultimately costs you much more than the amount borrowed.

## How does the interest rate on your credit work?

The primary source of fees for your credit is its nominal interest rate. This is an amount listed on your loan contract. This can work in several different ways, which will have to be specified during the first negotiations.

### Fixed or variable rate?

The first parameter to take into account in your calculations is the quality of the rate applied. Is it fixed or variable?

• If it is fixed, it will remain the same throughout the contract.
• If it is variable, it will evolve according to a reference index which will have to be defined (inflation, evolution of inter-bank borrowing rates, etc.). If you take out a long-term loan, a fixed rate will often be preferable, but you can choose to speculate on the variation of the interest rate if it is likely to fall in the years to come.
• If it is mixed, it will have a fixed component and a variable component.

The method of repayment of interest may also be different and be made by monthly payment or in arrears, that is to say in one installment at the end of the annual period.

Taking out a loan does not only generate interest, you will have to pay additional costs.

### Application and related costs

You will generally have to pay administration fees, excluding specific offers. These are negotiable and are established on a lump sum basis or according to a percentage of the capital determined in the contract. To these will be added additional costs incurred by the bank, tax stamps, registration fees, etc.

### Death and disability insurance

With your contract, you will take out death and disability insurance. An offer will be offered to you by your bank but you can call on another insurer to reduce your costs. However, the guarantees offered must be equivalent. The rate applied may be a percentage of the loan or be a function of the amount borrowed (\$ 5 in increments of \$ 1,000 per year, for example).

You can also take out job loss insurance, in which case you will have to add these costs to the total cost of your loan.