When applying for a credit, loan or credit card, how many times have you seen the initials CAT? Do you know what they mean? Here we share the definition and tell you how to calculate this element.
The CAT or Total Annual Cost It is a standardized measure of the cost of financing, expressed in annual percentage terms, according to Banxico’s definition. In simpler terms, it is an indicator that allows users to know how much they are going to pay in the end for a credit and to be able to choose the most convenient credit or credit card available.
For informational purposes, the Total Annual Cost includes all the costs and expenses corresponding to the credits granted by the institutions. These costs include the interest rate, annuities, commissions for various operations as well as any other cost that the user must pay.
Banxico in its circular 9/2015 established some changes to the methodology and the formula with which financial entities must calculate the CAT of their products, as well as the components and assumptions that must be included.
Among these changes, the most relevant can be summarized in the following points:
- The calculation of Total Annual Cost You must include the cost of any insurance that is considered mandatory to access a credit.
- The CAT must include all commissions required for the client to access preferential rates.
- Financial institutions must safeguard and have records of the calculations of the CAT.
- Institutions must clarify to users all the elements included in the Total Annual Cost presenting a breakdown that also includes extra payments such as insurance, commissions and any other expenses.
How to calculate the CAT? An example
Imagine that you require a loan of 40,000 pesos and you go to several financial institutions to see what the CAT of each one to choose the best one for you.
In institution 1 they will only charge you for this loan an annual interest of 20% of the loan, which is equivalent to 8,000 pesos. This means that in the end you will pay 48,000 pesos, which would imply that your credit has a CAT of 20%.
$40,000 + $8,000 annual interest = CAT 20%
Now imagine that in institution 2, in addition to the annual interest, they charge you 2,000 pesos for an annuity when obtaining that same credit. You would end up paying this credit in 50,000 pesos, which would imply a CAT of 25%.
$40,000 + $8,000 annual interest + $2,000 annuity = CAT 25%
You go to a third institution where, in addition to the annual interest, the credit annuity, they will also charge you an amount of 1,600 pesos for the opening. You would end up paying the credit in 51,600 pesos, which would be equivalent to a CAT of 29%.
$40,000 + $8,000 annual interest + $2,000 annuity + $1,600 opening = CAT 29%
And just like in this example, financial institutions must give you detailed information about what the CAT of each of its products so that you can compare and choose the one that best suits you.
To calculate the Total Annual Cost of a financial product, you can also use the calculators that Banxico makes available to the general public:
Editorial Team The editorial team of EMPRENDEDOR.com, which for more than 27 years has worked to promote entrepreneurship.