In Ukraine, there is a growing misunderstanding of the real cost of loans due to the fact that the real annual interest rate (RAR) sometimes reaches more than 3,600%. At first glance, this is a real shock for consumers who are used to seeing advertisements with the offer of “1% per day” and expecting about 365% per annum.
Sergiy Sinchenko, a financial expert and CEO of Moneyveo, wrote about this in his blog, explaining the reasons for this gap between customer expectations and official figures.
The main difficulty lies in the formula for calculating the PPI, approved by the National Bank Resolution No. 16. It is based on the XIRR method, a complex financial function that takes into account each payment, the date of its execution, and the reinvestment effect. As a result, even simple loans with an interest rate of 1% per day yield a formal rate of over 3,600% per annum.
“The formula is mathematically correct, but not easy for an average consumer to understand,” Sinchenko says. “It simulates compound interest, as if the lender reinvests every payment received. This makes the effective rate look gigantic, even though the client is actually paying a simple interest rate.”
The paradox is that companies that operate transparently, without hidden fees and additional charges, often have a higher APR due to an objective methodology. Meanwhile, companies with numerous small payments may show lower official rates, but the actual costs to customers are higher.
The expert suggests keeping the RRPS tool, but simplifying its presentation for consumers. In particular, he recommends using a more intuitive calculation for simple loans, which would reflect the percentage of total loan costs without complex capitalization.
Such changes will help make the lending market more transparent and understandable, increase customer confidence, and promote healthy competition.
