The Calculation of Anatocism: Excessive Interest on the Loan

The calculation of anatocism is an operation that can be used by a bank’s client to prove that it has suffered excessive interest on its loan or mortgage. This is what we talk about when discussing banking anatocism: the practice adopted by credit institutions to make the customer pay “interest on other interests”, through the compound capitalization calculation mechanism. We remind you that this operation constitutes a civil offense and is expressly prohibited by Italian law, also confirmed by some judicial decisions.

The calculation of interest

The calculation of interest

The calculation of interest and compound interest is carried out by law firms or consulting firms that assist their clients in any disputes with the bank. This is an operation that can become very complex: however, we will try to explain to you in a simple way how it works, so that you can be prepared in case you suspect you are paying undue interest.

The quarterly compound capitalization mechanism implies that instead of being calculated only on the loaned capital (simple interest), the interest also takes into account the interest that has already expired, ie relative to installments already paid by the customer. In this way, the basis on which the percentage expressing the interest rate is calculated tends to grow at each quarterly maturity and makes the payment of interest more expensive. In fact, the customer does not pay interest calculated at the end of the year on the capital, but on the sum of capital and interest that grows at each quarter.

Let us look at a simple example of the calculation of anatocism to explain this concept more clearly. Consider a loan of 1,000 euros, with a 10% interest rate. If the bank behaves correctly, the annual interest to be paid will be equal to 100 euros, then 25 euros each quarter. Through compound capitalization, however, the bank could calculate the payment of the second installment on the sum of the loaned capital and the interest already paid with the first: instead of paying 25 euros, with the second payment if they would pay 25.625. By performing the same operation at each quarter, the weight of interest would grow more and more. This is precisely the danger of anatocism.

We must therefore pay attention to the amount of interest that is paid. If you then turn to a professional who intends to carry out the calculation of compound interest precisely, it will be a good idea to present yourself with all the documentation relating to your relationship with the bank.