Interest from the bank or financial institution is the basis for a series of financial services, mainly credit and investment. It is from them that income and rates are defined.
Understanding the basic glossary of this universe and how interest rates are defined helps when negotiating and contracting financing or making a financial investment.
This is part of which helps not only in planning personal finances, but also in building and maintaining wealth.
How do interest rates work in banks and financial institutions?
“Anywhere in the world, the definition of interest starts from the , which in Brazil is Selic”, explains Myrian Lund, professor of MBAs (Master of Business Administration) at FGV (Fundação Getulio Vargas) and finance specialist.
She says that Selic is the basis because the financial institution raises money at this rate and, from there, adds taxes, operating costs, risk of default and profit, generating the interest rate.
“The institution also looks whether any asset will be sold as collaterallike a car or property”, highlights Lund, saying that this is the reason why interest on special checks and credit cards are more expensive. Because they have no guarantee behind them, they end up having a higher bank spread.
This difference is important to know what changes in a and onefor example.
What to do when you need to compare interest rates on a loan or financing?
The FGV professor gives tips on how to compare interest rates when hiring a financial service. Prepare in advanceeven in times of financial tightness, is the key to reducing money costs.
The first step is to access the rates charged in the financial market for the product you are looking for. Myrian Lund suggests the Central Bank (BC) as a source, which has useful and updated data and statistics:
- In the search field, search by interest rate;
- Click no which is titled simply “Interest Rates”;
- Select the type of service to see its specific rates. There are both for individuals and legal entities.
This way, you have access to average rates charged by financial institutions in services such as credit card installments, special checks, payroll loans, real estate financing, among others. These are the values practiced by the financial market, updated every one to two weeks.
“Not the rate that everyone hasbecause for each person it is different, depending on their ability to pay”, recalls the teacher. “This is an average, both for those with high income and low income. And the difference is that high income requires investment, which ends up making credit cheaper.”
Lund says that people who have money invested can use this as collateral to get a rate more similar to that of financing a property or car, for example.
Once you have this in hand, you can compare the interest rates offered by banks and financial institutions and even negotiate better conditions.
What are the precautions when taking out credit?
Even with the the expert explains that in most scenarios banks and financial institutions still offer better conditions for those who already have a history of relationships with them.
“Don’t be late with your bills and have a good It improves the relationship”, explains Lund. “It’s okay if you have a bad name. If you clean it up, everything goes back to square one. But your score will increase progressively as you keep making payments, not all at once.”
The professor highlights that care goes beyond the interest rate: the payment must fit within the budget. Especially in the case of borrowing to pay other loans, which deserves extra attention.
“You have to be very careful before doing it”, says Lund. “Even with a low rate, you can get stuck. So how are you going to pay your bills?”
She warns that this is common in carelessness with payroll loans. “You are taking credit that is cheap for anything, but if you take the entire limit, it reduces your salary without seeing the impact it has on your income”, he explains. “You spend 8, 10 years receiving half a salary, then your accounts won’t close.”
The expert says that the ideal is always take only the amount of credit that is neededand in the shortest possible time, to get rid of debt as soon as possible.
What are the main terms and concepts about interest?
Using financial services involves a common vocabulary of institutions not only on interest, but also on payment methods, credit and contracts. Part of financial education and personal finance planning is to understand what they mean. Below, see the glossary with examples:
Fees
The interest rate is the price charged for the use of money over time, identified as a percentage in contracts. It works like a “rent”, paid to the creditor who lent the money. Therefore, in the case of financing, you are the one who pays this extra amount. In investments, you are the one who receives.
Example: You borrow R$1,000 from a financial institution, with 10% interest per month. The following month you must pay R$1,100. This difference of R$100 is interest.
O calculation for interest It’s simple: just multiply the loan amount by the interest in decimal form. In this case, it would be 1,000 * 0.1 = 100. To find out the decimal form, just divide the interest percentage by 100 (10 / 100 = 0.1).
CDI
The Interbank Deposit Certificate (CDI) is a security issued by financial institutions to lend money to each other. As banks need to close the day with a positive balance, those who have a surplus lend to those who are in the red. It is also the main reference for fixed income.
Example: in the case of an investment that gives 100% of the CDI, and it is yielding 12% per year, this is the percentage return on your investment in the same period. If you invested R$1,000, you will have R$1,120.
Selic Rate
It’s the basic interest rate of the economydefined by Copom (Central Bank Monetary Policy Committee), today defined at 14.50%. Selic is the main form of inflation control in Brazil and in much of the world, and serves as a reference for all other interest rates charged in the country.
Its acronym translates into Special Settlement and Custody System, and its effects on financial services basically occur in two ways:
When it’s higheras is the case today, loans, financing and credit become more expensive for those who need to take them out. Meanwhile, investments yield more, which is an advantage for investors.
In moments like 2020, when there was a historic lowreaching 2% per year, the opposite happened, with investments yielding less and credit being cheaper.
Bank spread
It is the difference between the interest rate that the bank pays investors when raising money and the interest rate it charges when granting loans or financing.
This margin is what covers administrative coststaxes, default risk and the financial institution’s profit.
Example: If you have an account with a return of 6% per year on the money invested, and the financial institution takes this same money and lends it to someone else to finance the car, charging a rate of 26% per year, the difference between the two is the bank spread.
In this case, it would be 26% – 6% = 20% per year. A spread of 20 percentage points.
IOF
The Tax on Financial Transactions is a federal tax charged on transactions such as credit, exchange (foreign currency), investments and insurance.
Example: whenever you make a purchase on foreign websites or use the card on international trips, an IOF is charged. In the case of an item that costs US$100 abroad, you pay the dollar value plus the IOF of 3.5% on the transaction.
Card rotation
Also known as revolving credit, it is a auto loan triggered when an amount less than the total card bill is paid by the due date. The unpaid difference goes into the revolving interest, which is considered the highest on the market.
Example: If your invoice ended at R$1,000 and you pay the minimum required, 20%, equivalent to R$200, the remainder goes to the revolving account (R$800). Your new expenses will be charged on the following month’s invoice, plus R$800, plus interest and IOF on this amount for the time the money was not paid.
special check
It’s a pre-approved and automatic line of credit linked to its countercurrent. It is used to cover expenses, payments or withdrawals when your balance runs out, and is considered one of the most expensive loans on the market, with daily interest and taxes (IOF).
Example: If you made a payment of R$500 with your current account balance already at zero, this is the amount considered “borrowed” by the financial institution. Interest is charged for the time it takes to deposit the same amount into the account to pay off the debt.
Personal loan
It is a type of credit in which the bank or financial institution lends an amount that can be Used however the customer wantswithout having to provide an asset, such as a car or property, as collateral. Payment is made in fixed monthly installments with interest.
Example: You take out a personal loan of R$5,000 from a financial institution, to pay in 12 fixed installments of R$480 per month. In this case, you pay R$760, equivalent to 15.2% interest for the period.
Consigned credit
It is a loan in which the installments are deducted directly from the salary or INSS benefit. Because the discount is made in this way, it is considered to have a high payment guarantee and has lower interest rates. Financial institutions, like Inter, for example, usually offer tools.
Example: You are an INSS retiree who receives R$2,000 per month and takes out a loan of R$5,000 to pay in 24 installments of R$250. In practice, before the money even reaches your account, the INSS already deducts the R$250, and you receive R$1,750 in payment.
Fiduciary alienation
It’s the name of the type of guarantee in which the debtor of financing associates the possession of an asset, usually a car or property, with the contract with the financial institution. This way, you continue to use your property, but it can be taken by the institution if the payment is not paid.
Liquidity
It represents how easy and quick it is to transform an asset or investment into cash without losing value. In other words, how quickly you can have the money on hand to use when you need it. Examples:
- High liquidity: money from your current account, savings, and investments with daily liquidity, such as those popularly called Selic Treasury and part of the CDBs.
- Low liquidity: real estate, vehicles, works of art and other rare items, fixed income investments or shares of smaller companies with low daily trading volume.
credit score
It is a score from 0 to 1000 measures the likelihood that a consumer will pay their bills on time. Financial institutions use this score to assess the level of risk in providing financial services such as loans, cards or financing.
Example: A score from 700 is considered low risk for the institution, and a score of 300 usually represents people with a “dirty name”, who are negative.
