The difference between borrowing rate and effective rate
The borrowing rate, formerly known as the nominal interest rate, indicates how much interest is calculated on the net loan amount. The annual percentage rate, on the other hand, indicates the actual loan costs incurred per year.
Good to know: You can remember the difference between debit interest and effective interest as follows: The debit interest is the basic rent, the effective interest, on the other hand, is the warm rent including all additional costs.
When searching for the right loan offer, you should only use the effective interest rate and not the lower borrowing rate. Because the benchmark for a cheap loan is the annual percentage rate, which is given in percent.
Why a loan comparison is not possible via the borrowing rate
The borrowing rate forms the basis for the calculation of loans. It is the interest rate at which you borrow the money from the bank. Each bank can determine the initial level of the interest rate individually, but not arbitrarily. The banks base their calculations on the Good Finance interest rate or the bank interest rate – reference interest rates determined under certain conditions.
The final amount of the borrowing rate depends on factors such as the amount of the loan, the term, the purpose of use and the creditworthiness of the borrower. An objective credit comparison based on the borrowing rate is difficult due to the specific factors that determine the borrowing rate and is therefore not recommended.
Price-determining factors for the annual percentage rate
The consumer credit directive was introduced in 2010 to improve the comparability of credit offers. This obliges every lender to state the effective interest rate. This indicates how expensive the loan will be in total. The price-determining factors that make up the effective interest rate are:
- the borrowing rate, i.e. the fees for lending,
- the discount (the payment rate existing at the time the loan was granted),
- the duration of the fixed interest rate and
- the repayment rate.
Processing fees for lending are also often listed. However, these have been inadmissible since October 2014 and must therefore always amount to $ 0.
Although an APR is much more meaningful than the borrowing rate, it does not include all of the costs that may arise in connection with a loan. For example, because the amount of early repayment penalties (penalty fees), account management fees or contributions for residual debt insurance are not always incurred, they cannot be included in the APR. In the case of real estate loans, appraisal fees and commitment interest would also be added.
How to compare offers correctly
The lower the APR, the cheaper the loan. When comparing loans, make sure that the terms of the offers to be compared are similar. Above all, the loan amount, term, fixed interest rate and repayment should be identical, otherwise the effective annual interest rate cannot be used as a reference for the comparison.
Calculate the APR
The annual percentage rate is usually calculated using the uniform method:
However, the uniform method is unsuitable for the installment loan comparison and should only be used as a rough estimate. However, you will receive a precise calculation that you should use to orient yourself from the credit institutions themselves. According to the Price Disclosure Ordinance (PAngV), they are obliged to perform a representative sample calculation. According to §6 PAngV, the total costs for a loan are to be shown as an annual percentage rate. This means that wherever an effective interest rate is used for advertising, the associated sample calculation must be specified with all the prescribed cost factors.
In the representative sample calculation according to §6 PAngV, the banks state an average value for the effective interest rate. This reflects the annual percentage rate that two thirds of customers receive when taking out a loan. So-called decoy offers that only advertise with the best interest rate are excluded. A credit comparison is so transparent and easy to carry out.