The rate is the bait; the cost is something else
"12% a year" sounds better than "18% a year"… until the 12% loan charges a 3% origination fee, mandatory insurance and a monthly "servicing" fee. The real cost of a loan is everything that leaves your pocket on top of the principal. That is why a measure exists to unify it.
What the CAT is and who defines how it is calculated
The Total Annual Cost (Costo Anual Total) is the annual rate that equates, in present value, what you receive against everything you will pay: interest, fees and the loan's other charges. The methodology —formula, components and assumptions— is set by the Bank of Mexico (Circular 21/2009, amended by Circular 9/2015, DOF 27-Apr-2015), and financial institutions are required to publish it in their advertising and contracts. The advertised CAT is expressed without IVA — another reason your bill may exceed what was advertised.
What it includes — and what it doesn't
- Includes: interest, origination fee, periodic fees, mandatory insurance and discounts to the amount drawn.
- Does not include: the IVA on interest and fees, default charges (late-payment interest) or optional expenses.
An individual or a private firm is not required to publish a CAT, but you can always calculate the implicit one: from the amount, term and monthly payment you can back out the effective rate you actually pay. Our total cost and CAT calculator does this even if you only know the monthly payment.
How to compare properly (checklist)
- Same amount and same term. The CAT changes with both; comparing a 24-month loan against a 48-month one tells you nothing.
- CAT + total payable. The percentage ranks them; the pesos make it concrete. A low CAT over a very long term can cost more money in total.
- Ask what happens if you prepay. Prepayment penalties change the real cost if you plan to pay it off early.
- Late-payment interest is separate. It is not in the CAT; check the clause (and our article on late-payment interest).
House rule: if the one lending to you can't tell you the total cost in pesos and in writing before you sign, they're not your counterparty. At Tunton the rate, the term and the cost are agreed in writing, with no hidden fees.