People who take out a loan receive a certain loan amount from a bank or a private creditor at a specified loan interest rate (also called loan interest). They must repay this either in small installments, which include the costs for the loan interest rate, over a longer period (also called the term), or they must repay the full loan amount at a fixed agreed time. When applying for a loan, the lending institution usually also checks your creditworthiness with Schufa. Creditworthiness is important to the lender because they want the assurance that the installment loan can be paid off within the stated term. Schufa can provide information about your creditworthiness, since all entries, whether positive or negative, are recorded there.
A loan can be very helpful in many situations. Especially when buying or building a house, most people depend on a loan, but loans are also useful for other large purchases. Buying a new car, costly renovation work on your home, or another major expense can also make a loan necessary, and loan interest will therefore be incurred.
In many cases, loans are already helpful for smaller purchases because the required items are available immediately and the borrower does not have to save for a long time to buy them. The loan is often very helpful, but it always has its cost.
For providing the loan amount, banks charge a loan interest rate. This means that the borrower not only has to repay the loan, i.e. the principal amount, but also incurs somewhat higher amounts (loan interest) to pay for the bank's services. The interest is thus a kind of consideration paid by the borrower to the lender. Interest can also be seen as a type of borrowing fee for the loan amount. The loan interest rate can be stated in different ways.
The nominal loan interest rate
The calculation of an interest rate is common in financial transactions. For example, if a depositor places money with a bank, they receive interest. If, on the other hand, you borrow money from banks in the form of a loan, you must pay loan interest for it.
If you receive interest on a savings balance, this is shown as credit interest. If you have to pay interest on a loan, these are called debit interest. The amount of interest results from the amount on which the interest is charged and from the agreed interest rate. These must be repaid together with the loan amount within the planned term.
More information under: Interest rate on loans.
Calculation example for the nominal loan interest rate
Loan interest is generally calculated once a year. For example, if you take out a loan of 10,000 euros at a loan interest rate of 5%, 500 euros will be due after one year. However, for most installment loans, the installments must be paid every month. In this case, the loan interest rate is recalculated for each period.
If, for example, you repay 100 euros each month, after one month interest will only be calculated on a loan amount of 9,900 euros, and after another month only on 9,800 euros. To enable this calculation, it is necessary to determine the loan interest rate for each individual day.
This ensures that you only ever pay interest on the amount that was actually borrowed at the respective time. Nominal loan interest rates can vary significantly between different loan offers. Therefore, it is always important to compare the loan interest and the other terms of the different loan offers carefully. By comparing, you can also save a lot of money by getting better loan interest rates. But terms such as the loan duration can also be influenced by planning the installment amount and should therefore be carefully considered in advance. Thus, a comparison is always advisable.
The effective annual interest rate
A loan not only incurs loan interest; there are also many additional fees. For example, many banks charge an administration fee and a loan fee. Interest-free repayment years can also affect the actual price the customer has to pay for the installment loan. In addition, there are different methods for calculating repayment, which can also affect the final payment amount. These additional costs mean that the nominal interest rate is only one of several factors responsible for the amount of the monthly installments.
Therefore, consumers often find it difficult to compare different loans and their terms. With one loan, the actual burden can therefore be higher than with another loan, even though the nominal interest rate is actually lower. For this reason, there is a law in Germany that requires banks, in a loan contract, not only to state the nominal interest rate and the various handling fees but also the effective loan interest rate. This indicates how high the total costs for the loan are and includes both the loan interest and all other fees. Therefore, the effective annual interest rate should always be used for comparison instead of the debit interest. The debit interest only covers the pure interest costs, whereas the effective loan interest rate, also called the effective interest rate, includes all costs. The debit interest can also be regarded as a kind of borrowing fee.
Disclosure and calculation of the effective annual interest rate
The legislator has also specified a procedure according to which the effective annual interest rate must be calculated. This uniform procedure is intended to guarantee that the effective annual interest rate is calculated in the same way by all banks and actually reflects the total costs for the loan. For this reason, it is always more important for the consumer to compare the effective annual interest rate. If the customer only compares the nominal interest rate, the costs for the loan may still vary significantly.
In a loan agreement, the effective annual interest rate is also mandatory. If the data in a loan agreement were calculated incorrectly and the values resulting from the fees and the nominal loan interest rate should be higher than the stated effective annual interest rate, the bank is always obliged to reduce the nominal loan interest rates so that the agreed effective annual interest rate is complied with.
Compare loan interest rates quickly and easily
If you need a loan and want to compare different loan offers, it is always sensible to pay primary attention to the loan interest, especially the effective annual interest rate. This allows you to assess the total cost of the loan at a glance and compare it better with other loan offers.
If you are looking for an affordable loan, it is advisable to use an online loan calculator. This will show both the nominal interest rate and the effective annual interest rate. To keep total costs low, it is always sensible here to choose the offer with the lower effective annual interest rate.