Interest rates on loans
Banks don't work for free; therefore interest must be paid on loans. With the interest paid on the borrowed sum, the bank finances itself and generates profits. There are two different interest rates: on the one hand the effective annual percentage rate (effective interest rate) and on the other the nominal (or stated) interest rate. The nominal interest rate is of limited informative value, as it merely reflects the interest burden for the amount borrowed. The effective interest rate includes, in addition to the pure interest payments on the borrowed capital, other costs that may arise from a loan agreement. These include, for example, disagio (loan discount), account maintenance and origination fees.\ \ The effective interest rate must always be disclosed. The law requires banks and credit institutions to do so in order to make rates comparable for consumers. However, the regulation was not implemented consistently. Only mandatory costs have to be included in the effective interest rate. Many credit institutions offer residual debt insurance with their loans. This insurance does not, however, have to be taken out; it is not mandatory. Nevertheless, the nominal interest rate often drops significantly when residual debt insurance is taken out. Most customers therefore choose to take out such insurance. The costs do not have to be included in the effective interest rate, and so it can happen that although the nominal rate falls, the loan becomes more expensive overall due to the residual debt insurance.
Comparability of interest rates
The effective interest rate is not always suitable for comparing loans, as it does not apply to all examples. In principle, only loans can be compared with each other that relate to the same loan amount and the same fixed interest period. In many car financing cases only interest rates are stated, but the purchase price is not given. This means the most important parameter is missing and the effective interest rate cannot be used for comparison. Furthermore, not all cost factors are actually taken into account, so the effective interest rate can never make a definitive statement about the real cost of the loan. However, it serves as a guideline for comparing loans in general.
Interest-free loans
In principle, interest is charged for almost every loan agreement by the lender, but there are a few exceptions. Loan agreements concluded to promote certain measures can be interest-free. In general, these are loan agreements that are concluded to finance eligible projects (for example, climate protection). For these loan agreements, only repayment of the principal must be made.