Loan interest as a cost of a loan

Anyone who takes out a loan must expect various costs. In addition to interest, there may also be other fees.

Before signing a contract, it is therefore important not only to inform yourself about banks' interest rates, but also to consider other loan fees, because they can make an apparently cheap loan quite expensive.

Loan interest is undoubtedly the most important loan cost. It is charged as a fee for borrowing money and is paid monthly as part of the installment or separately as interest payments to the bank.

Interest rates for loans are intended, on the one hand, to cover the banks' costs, since the money they lend to customers must be borrowed from the central bank or collected as investments. On the other hand, the bank naturally also wants to make a profit.

Amount of interest costs

The level of loan interest varies greatly depending on the type of loan. For overdraft facilities (disposition credit), for example, a comparatively high interest rate is charged because banks merely set up a credit line and must keep those funds available. However, customers often use only a small amount, so the high interest can still cover the costs incurred.

Borrowers receive lower interest rates if they opt for longer-term financing in the form of installment loans or even mortgage financing — loans with longer terms. Since interest rates are often based on the borrower's creditworthiness, the loan term, the amount of collateral, as well as the borrower's income and household surplus are decisive.

Depending on the business model, interest costs can differ significantly. Therefore, it is worthwhile to carry out a rate comparison in each case to take advantage of the cheapest loan offers. For an initial estimate of how term and installment affect the interest portion, you can also first use a loan calculator. Loan calculators never provide concrete and individual offers. They serve consumers solely to estimate the rough costs for the desired loan amount and term. Anyone who wants to calculate a concrete repayment plan according to their own financial possibilities should obtain offers from several lenders.

By the way, banks are generally no longer allowed to charge processing fees for consumer loans.

Costs in the form of effective and nominal interest rates

Loan agreements frequently show two different interest rates. One is the nominal interest rate. It indicates the actual interest charged on the loan based on the loan amount.

In addition, banks always state the effective interest rate (APR). It provides an overview of the total loan costs because it includes the nominal interest rate as well as processing fees and thus shows at a glance how much a loan costs. In general, the effective annual interest rate is significantly higher than the nominal rate. This can indicate high processing fees.

For this reason, when comparing loans it is important to always use the effective interest rate as the basis for comparison in order to be able to compare the actual loan costs.

What additional loan costs may occur?

Some institutions may also charge fees for mailing account statements or for confirming the paid loan interest.

In particular for mortgage loans, additional costs can arise for the provision of collateral. Such loans typically require a land charge as security. This must be registered by a notary at the land registry. Notary fees and land registry costs are then borne solely by the borrower.

To find out about these costs, you should take a look at the bank's price and service list. This lists all loan-related costs. In most cases, it is possible to access it online at any time.

Is credit insurance also a fee?

For installment loans, banks additionally offer customers the option to take out credit insurance when concluding the loan. This insurance is intended, for example, to cover the outstanding loan amount in the event of death. It can also cover the monthly loan installments in the event of job loss or incapacity for work.

The costs of credit insurance are fundamentally not loan fees because taking out the insurance is voluntary. For this reason, these costs are not included in the effective interest rate.