Total cost of credit should cover maximum possible rate and extra services: regulatory stance
Lenders should calculate the total cost of credit (TCC) based on the maximum interest rate, except when the lender may raise the rate following the borrower’s failure to meet their insurance obligations.
Furthermore, the costs of extra services — which reduce the interest rate if purchased — should also be covered by the TCC. This is explained in the Bank of Russia Information Letter addressed to banks, microfinance organisations, credit cooperatives and pawnshops.
Although an interest rate on a consumer loan may vary subject to the way loan funds are spent (cash or cashless transactions), some additional documents the borrower may supply or the use of extra services (e.g. insurance), the TCC should capture the entirety of borrower liabilities.
This approach helps the borrower to take a correct view of their debt and financial capacity, encouraging fair competition among banks.
It is also recommended that lenders inform borrowers about the TCC they could have if they used paid services in exchange for a reduced interest rate.