Nominal rate, effective rate and total cost: how to read a loan's fine print

When you apply for a loan, you may see several similar-looking but different numbers: nominal rate, annual effective rate and total cost (CFT, for "costo financiero total"). Mixing them up is common, and lenders don't always explain which is which. Here's the difference in plain terms.

Nominal annual rate (TNA)

This is the "base" rate, without accounting for how often interest compounds. On its own, it doesn't tell you the real cost of the loan, because it doesn't reflect that interest is charged, say, every month instead of once a year.

Effective annual rate (TEA)

This is the rate that does account for compounding: if you're charged interest every month, the TEA will be higher than the TNA, because "interest on interest" keeps building up. In Paraguay, the BCP uses the effective annual rate as its reference for the legal cap: in October 2026 it was 27.26% effective annual for loans in guaraníes.

CFT: total financial cost

This is the most complete number: it adds the effective rate plus every fee on the loan (insurance, administrative costs, origination fee, taxes if any apply). Two loans with the same TEA can have a different CFT if one charges more extra fees. The CFT is what you should look at to compare offers.

Example: two loans with the same rate

With the same effective rate, Loan B ends up costing more in practice because it adds fees that aren't in the rate. That's why asking only for "the rate" isn't enough: always ask for the CFT or the full fee breakdown.

How to ask for this information

• Ask in writing for the effective annual rate and the CFT, not just "the rate".
• Ask whether there's mandatory insurance and how much it costs.
• Ask about origination, administrative or closing fees.
• Ask for the full amortization table: how much of each payment is interest and how much is principal.

Why this matters in Paraguay

The BCP sets a monthly maximum effective annual rate for loans (27.26% in guaraníes, 11.30% in foreign currency, October 2026) and for credit cards (19.62% in guaraníes). Those caps apply to the effective rate, not necessarily to the full CFT with every fee, so the legal cap doesn't protect you from extra charges outside the rate. Checking the CFT is on you.

My payment gives a rate above the BCP maximum

If calculating your effective rate comes out above the month's BCP maximum, ask your lender for the breakdown. There could be a calculation error, or something being included that shouldn't count as interest.

Run the numbers with your own figures

In the true cost of a loan calculator, enter the amount, term and the payment you're offered: it shows the real effective rate and compares it to the month's BCP maximum.

Frequently asked questions

Is the TNA always lower than the TEA?

Yes, unless interest compounds only once a year (an uncommon case). The more often it compounds, the bigger the gap.

Why does the BCP use the effective rate, not the nominal one, for its cap?

Because the effective rate better reflects the real cost you'll pay, by including the effect of compounding.

Does the CFT include tax?

It depends on the product and the institution. Ask for it in writing before signing.

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This article is educational, not financial advice. The example amounts are hypothetical.

Sources

• Central Bank of Paraguay (BCP), maximum effective annual rates, October 2026, for loans and credit cards.