Loan interest as a cost of a loan

Anyone taking out a loan must expect various costs. In addition to interest, there are also other fees.

Before signing a contract, it is therefore important not only to inform yourself about banks' interest rates but also to consider the other loan fees, because they can make an apparently inexpensive 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 payments or separately as an interest payment to the bank.

Interest rates for loans are intended, on the one hand, to cover the banks' costs, since they either borrow the money they lend to customers from the central bank or collect it in the form of investments. On the other hand, the bank of course also seeks to make a profit with them.

Amount of interest costs

The level of loan interest varies greatly depending on the type of loan. For overdrafts, for example, a comparatively high interest rate is charged because banks only set up a credit line and must hold this money accordingly. However, customers typically use only a small amount, so the high interest can still cover the resulting costs.

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

Depending on the business model, however, the costs for interest can differ considerably. Therefore it is worthwhile to carry out an individual interest comparison in each case to take advantage of the cheapest loan offers. For a first estimate of how term and the installment affect the interest portion, a loan calculator can also be used initially. A loan calculator never provides concrete, individual offers. It only serves consumers to estimate the rough costs for the desired loan amount and term. Anyone who wants to calculate a repayment plan corresponding to their own financial possibilities should obtain offers from various lenders.

In the meantime, 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 often state two different interest rates. One is the nominal interest rate, which indicates how high the actual loan interest is that is calculated based on the loan amount.

In addition, banks always state the effective interest rate. It provides an overview of the total loan costs because it includes the nominal rate as well as any processing fees and thus shows at a glance how much a loan costs. As a rule, the effective annual 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 comparison figure in order to compare the actual loan costs.

Which additional loan costs can occur?

Some institutions ultimately also charge fees for the sending of account statements or for confirmations of the paid loan interest.

Especially with real estate loans, additional costs for the provision of collateral can occur. For these loans a land charge is usually required as security. This must be registered by a notary in the land register. Notary fees and the costs of the land registry are then borne solely by the borrower.

To find out about these costs, you should take a look at the bank's fees and charges schedule. All loan costs are listed here. Typically it is possible to access it online at any time.

Is credit insurance also a fee?

For installment loans, banks additionally offer their customers the option of taking 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 also steps in in the event of job loss or incapacity to work and covers the monthly loan installments in that case.

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