When you look at loan offers from two banks, one may show "12% interest" and the other "10% interest," yet the second offer may not turn out cheaper in the end. The reason is commissions and additional charges — they do not appear in the advertised nominal rate but have a real impact on your pocket. In this article we explain the difference between interest and commission, why the effective rate combines the two, and how to compare two offers correctly.
What is the nominal rate?
The nominal rate is the figure written in the largest print in loan advertisements and in the contract. It reflects only the interest charged on the borrowed amount and does not include additional charges. When a bank says "15% per year," this is simply the interest rate applied to the outstanding balance. The problem is that the real cost of the loan does not consist of this figure alone.
What are commissions and additional charges?
A commission is a charge the bank collects separately for servicing, processing, or account transactions. These are sometimes one-off and sometimes recurring monthly payments. The most common ones are:
- Processing commission: a certain percentage of the amount (for example, 1–3%) is charged at the moment the loan is issued.
- Account maintenance fee: a fixed monthly amount for the loan account.
- Insurance: required on some loans and added to the total cost.
- Cash withdrawal or transfer fee: transaction charges related to getting the funds into your hands.
How does the effective rate capture the difference?
The effective interest rate (sometimes called the "real rate") combines both the nominal rate and all mandatory commissions into a single annual figure. That is, if there is a processing fee, an account fee, and insurance, all of these are included in the effective rate. This is why the effective rate is almost always higher than the nominal rate — and it is precisely this figure that is the correct measure for comparing two loans.
Comparing two offers step by step
- Ask for the effective rate. Get the effective interest rate from both banks for the same amount and term.
- Compare the total payment. Compare the total amount you will pay by the end of the loan (principal + interest + commission).
- Separate one-off and recurring charges. One offer may have a one-off processing fee, the other a monthly account fee — over a long term, recurring charges can add up to more.
- Check whether insurance is mandatory. If it is required, add it to the cost too.
A practical example
The table below shows why looking only at the nominal rate is misleading. Both loans are for 10,000 manat over 24 months:
| Indicator | Bank A | Bank B |
|---|---|---|
| Nominal rate | 14% | 17% |
| Processing commission | 3% (300 AZN) | 0% |
| Monthly account fee | yes | no |
| Effective rate | ~20% | ~18% |
| Cheaper in the end | — | Bank B |
As you can see, the lower nominal rate (14%) actually turned out more expensive because of the commissions. Only the effective rate led to the right decision.
Which charges are negotiable?
Not all commissions are set in stone. The processing commission and some service fees can be up for negotiation, especially if you have a good credit history. The bank may reduce or waive these charges entirely in order to retain a customer. Insurance is often mandatory, but which company you buy it from is sometimes your choice — and that creates room for savings. Do not hesitate to ask; the worst answer you will get is "no."
Conclusion
Interest and commission are two separate parts of the cost of a loan, but only the effective rate shows them together. Look at the effective rate and the total repayment, not the big number in the advertisement — only this allows a fair comparison of two offers. You can use our consumer loan page to compare current offers by effective rate and calculate the monthly payment.
