CAE is a single value that represents the cost of a credit over a period of time. This value is expressed as a percentage and was created to convert financial products into easy-to-compare goods for users. Aware of the difficulty in comparing financial products, Sernac created in 2012 the Equivalent Annual Charge, known as CAE. This indicator allows users to have a single figure, which easily determines whether or not the financial product in question is appropriate.
The difficulty was that the various factors of consumer loans, mortgage loans and credit cards had an impact on the total cost of credit (CTC), making it very difficult to compare whether or not a loan was convenient for the consumer. At Compara we want you to always make the best decision before requesting a loan. Therefore, in this article we explain everything you need to know about CAE and how to take advantage of it.
How does the Annual Equivalent Charge work?
When comparing two loans of the same type and with the same term, the one with the lowest CAE will be the cheapest.
The CAE applies to the following products:
.- Consumer credit.
.- Mortgage credit.
.- Credit card.
.– University credit.
.– Commercial house credits.
1.- You simulate a consumer credit of 1 million pesos at 12 months, with a CAE of 15% in Bank A.
2.- Then, you simulate the same loan for 1 million to 12 months in Bank B, which offers you a CAE of 22%.
Bank A will be more convenient because for the same amount and term, it offers you a lower Equivalent Annual Charge, that is, a credit that, per year, will be cheaper than that of Bank B.
What values are included in the CAE?
Within the percentage that is reflected in the Annual Equivalent Charge, are all the expenses associated with a financial product. Among them:
.- Capital: the money that is requested as a loan.
.- Interest rate: amount that is paid in a period of time for each unit of the capital loaned.
.- Term of the credit: there are terms of 12, 24, 36 and 48 months, except mortgages that can go up to 30 years. The longer the term, the higher the interest and the more expensive the credit.
.- Credit own charges: operational expenses, stamps and stamps. Notary fees, appraisals and land study (in the case of mortgages).
.- Extra services voluntarily contracted: unemployment insurance, fraud, credit life and others.
What are the consumer’s rights when applying the CAE?
Law 20,555 enacted in 2012 indicates that the Equivalent Annual Charge is a mandatory figure in all financial products that are marketed in Chile.
This means that in each credit or credit card contract, the CAE must be explicit and must not vary. In case it is not visible, the consumer must ask for this percentage, and it is the bank’s obligation to report it.
At the same time, at the bank, multi store or financial institution can modify the Annual Equivalent Charge after the product was contracted. The CAE is an unalterable value that must remain throughout the term of the credit.
CTC: How is it complemented by CAE?
The Annual Equivalent Charge is a value that helps you compare and choose the best credit or the most convenient credit card, but it is not the only reference figure for consumers. In addition to the CAE, there is the so-called Total Cost of Credit or CTC and corresponds to the total amount that the client will end up paying for a credit at the end of the payment term.
Its main difference with CAE is the time span. While the CAE considers only the cost of a year, the CTC will be the total amount that you will have paid to the bank when you have paid the entire credit. Both indicators are complementary and will help you make a smarter decision when choosing a financial product.
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