What is AEIR?

Usually, borrowers focus on such parameters as loan amount, nominal interest rate, monthly payment, and early repayment option. However, an equally important indicator is the AEIR (Annual Effective Interest Rate). The lower the AEIR, the more favorable the lending terms for the borrower.

Let's understand what the AEIR in a bank loan is and try to explain this concept in simple words.

What is AEIR?

The AEIR, or Annual Effective Interest Rate, is the total amount you will overpay in a year while using a loan. It includes not only interest on the loan from the bank but also other fees and charges related to loan servicing. This includes insurance, the cost of issuing and maintaining a bank card to which the loan funds are credited, and account maintenance fees. It is important to clarify the interest rate size before signing a loan agreement.

By the way, the bank’s obligation to indicate the AEIR when issuing a loan is regulated by the Civil Code of the Republic of Kazakhstan. This makes the lending process more transparent and helps the borrower choose the most favorable loan program.

Annual Effective Interest Rates

For ten years—from 2011 to 2021—the rate was unified and remained at 56%. However, starting in 2011, it was differentiated depending on the type of loan, the form of collateral, and the loan term:

• 46% — for loan programs without collateral (i.e., unsecured loans). If the loan is issued with collateral, the borrower may qualify for a 35% rate.
• 25% — the interest rate for mortgage loans. This rate will remain applicable at least until July 1, 2026.
• 179% — the maximum rate for short-term microloans (this type of lending involves borrowing small amounts). This applies to both secured and unsecured microloans.

Thus, rates range from 20% to 46%. However, the upper cap is 46%. In other words, the APR (GESV) cannot exceed 46%.

Loan Repayment Methods

There are two types of payments to repay loan agreements – annuity and differentiated payments. Let's try to understand these concepts in more detail.

A loan consists of two components: the principal (the amount you directly borrowed from the bank) and interest (the bank's reward for using loan proceeds). The way how you repay the principal and interest is the basis for dividing payments into annuity or differential payments.

Annuity payment is the most popular due to its simplicity. The entire amount (principal + interest) is divided into equal installments considering the loan term. You repay the loan monthly, with part of the payment going towards the principal and the other part towards the interest. The ratio of principal to interest gradually changes: in the first half of the term, most of paid money covers interest, and in the second half of the term - the principal. Borrowers like this type of payment for a stable debt load: you know exactly how much you need to pay the bank, which allows for effective expense planning.

Differentiated payment does not offer such stability but means that monthly payments will decrease over time. However, in the first months, you will experience the maximum loan load. The essence of this approach is simple: each month you pay a fixed amount of principal, while the amount going towards interest repayment to the Bank gradually decreases. Also, the bank or organization engaged in certain types of banking operations has the right to offer the borrower additional loan repayment methods calculated according to internal rules.

How to Calculate AEIR?

A manager of the bank where you are consulting on a loan will help you calculate the overpayment amount. This is the simplest and most effective way, as all fees and other charges need to be considered in the calculation. Moreover, according to the Civil Code of Kazakhstan, calculations are performed using a complex formula designed for professionals – bank employees and financiers.

If you want to make calculations yourself, use the online calculator on the Kazakhstan Government’s website at Gov.kz. First, the system will prompt you to choose the loan repayment method: annuity or differentiated payment. Then, you need to provide information about the loan amount and term, issue date, interest rate, etc. The final step is to click the Apply button. The amount of interest on the loan will be calculated automatically.

In this article, we have figured out what the loan interest is and established that it is one of the most important indicators. It needs to be carefully studied when choosing a loan program, as it will help to adequately assess your solvency and avoid problems in the future, such as penalties and deterioration of credit history.

Author - Broslavskaya Natalia Alexandrovna