What the central bank's average rate is, and what it is not

Before signing a loan, almost everyone wants to know whether the rate they were given is reasonable. In Brazil the central bank publishes the interest rates institutions report for each kind of credit, and those figures are the closest thing to a reference. They are also easy to misread: a number that is right for what it measures becomes wrong when it is used for something else. This guide says what the figure contains, what it does not, and how to place your own rate next to it without being misled. It describes the source as it was understood when the guide was last updated; the central bank's own page is the reference.

Where the number comes from

Institutions that lend report their operations to the central bank, and the central bank publishes the result: for each kind of credit, the average rate each institution charged in operations already contracted. For most kinds of credit the series is daily and each figure is an average of the last five business days; for housing finance there is a monthly series. The central bank publishes what it receives and does not take responsibility for the data the institutions send.

What is inside the figure

The rate is the average effective cost of the customer, which means it already includes taxes and the operating charges of the contract. It is weighted by the amount contracted: a large loan weighs more than a small one in that institution's average. It is a rate a month or a year with compounding, the same kind the total effective cost, the CET, measures. That has a direct consequence: the figure to put next to it is the real rate of your contract, with everything counted, and not the rate announced in the proposal. The guide on the total effective cost explains what goes into it, and the rate comparison page takes a rate with the costs counted.

What it is not

• It is not an offer. It averages operations that have already happened, in a past period. Nobody is obliged to lend you at that rate today.
• It is not a ceiling or a floor. Institutions report averages, and within one institution there are contracts with lower and higher rates. A rate above the average is not irregular, and one below it is not a guarantee.
• It is not the rate of the whole system. The system average would weigh every institution by the amount it lent. What the comparison page calls the median is calculated by Finasst: the middle value among the institutions' own averages, each counted once.
• It is not a verdict. A position in a list says where a rate falls, not whether it should have been lower.

Why your rate can differ

The central bank itself notes that the cost varies between customers, even those of the same institution, and the reasons are mostly about risk and structure:

• The customer's risk. Income, credit history and the relationship with the institution move the rate more than anything else.
• The guarantee. Credit backed by a vehicle or a property tends to cost less than unsecured credit, so compare only within the same kind.
• The term and the amount. The same kind of credit with another term or another amount can have a different cost.
• What is included. An insurance that is mandatory in one contract is optional in another, and it changes the effective cost.

Comparing like with like

Take a R$ 10,000.00 proposal that announces 2.5% a month over 24 installments. The contract takes a R$ 150.00 fee, finances the tax on credit and charges R$ 30.00 of insurance a month. The announced rate is one number, and the real rate is another:

The figure to compare with the published average is 3.37% a month, not 2.5%: the average already carries the same kinds of cost. Comparing the announced rate would make the contract look closer to the average than it is. The contract check finds the real rate from the amount received and the installment, and the guide on nominal and effective rates explains why a month and a year have to be converted by compounding and not by multiplication. The values here are an illustration, not a quote.

The United States and Spain

There is no list of institutions for these two countries. The Federal Reserve publishes an average of what American banks reported for personal loans and car loans, as an annual percentage rate defined by Regulation Z, which is nominal, once a quarter. The European Central Bank publishes the average rate of new loans to households in Spain, which is the agreed annualised rate and leaves out fees, insurance and taxes. The two are not built the same way as the Brazilian figure, so the comparison page says which basis applies in each case and does not give a position, only the average.

How to use it

Use the published figure as an order of magnitude, not as a target. Compare the same kind of credit, the real rate with the costs counted and the same basis, month with month. A position well above the median is a question to put to the lender, what explains it, and not a conclusion; a position below it does not replace checking the term and the conditions for early payment. In both cases the contract and the lender's statement are the references, and renegotiating a debt starts from those numbers.