Meaning of loan interest rates

A loan is the granting of credit by a bank, insurance company or savings bank, for example for mortgage financing or the purchase of goods.

For a loan, lenders — i.e. the credit institutions — require monthly repayments and, of course, interest, which together with the repayment are paid monthly by the borrower. The loan interest rates can be understood as the price banks charge for granting the loan.

Loan interest: Costs of a loan

As mentioned, the costs of taking out a loan and the repayment rates must be paid monthly. It is therefore important to search for the most favorable terms possible before concluding loan agreements with a lending institution.

The loan interest rate is particularly important here. You should look for a lender that is on the one hand known as a solid institution and on the other hand charges as low loan interest rates as possible.

Creditworthiness and loan interest rate

"Creditworthiness" means a buyer's/customer's financial ability to repay a given loan. Many banks therefore check via Schufa whether the borrower has sufficient financial strength to cover the repayment of the loan and the payment of the loan interest. A positive Schufa score is therefore an essential factor for obtaining a loan in Germany.

However, there are certainly institutions that waive a Schufa check and still offer favorable loan interest rates. One can also obtain reports abroad (e.g. in Switzerland) to see whether convincing possibilities exist there to obtain a loan — it may be worthwhile in the long term.

Therefore, one can assume that all segments of society, including those who do not feel financially strong enough, can obtain a loan. In any case, you should by no means let yourself be deterred from taking out credit because you are too afraid of a Schufa check by the lending bank. As mentioned, there are reputable lenders who waive such checks and still provide the necessary funds. A comparison of the different providers is possible on various internet portals. Factors such as the effective interest rate or the loan amount can be compared here.

Determination of loan interest rates

The European Central Bank (ECB) sets the key interest rates monthly. Since banks borrow funds from there themselves, they orient the loan interest rates they charge on these key rates. As everyone knows, the ECB's key interest rates have been very low since the last economic crisis — therefore the loan interest rates (for example mortgage interest rates when purchasing a house) that banks or savings banks charge are comparatively at a very low level.

Loan interest rates naturally depend on the term of the loans, meaning, for example, that a loan with a five-year fixed interest period will be cheaper than one with a ten- or 15-year term. To achieve long-term stability of financial circumstances, it is generally advisable to aim for the longest possible fixed interest period.

Fully secured loans are cheaper

The interest rate for loans also depends on collateral. This aspect can be observed very well with mortgage loans. In the context of long-term mortgage financing, consumers have to pay high interest rates for loans if the financing is not fully secured.

Also for personal loans, collateral very often influences the loan interest. Personal loans that are not fully secured are granted on worse terms. For loans that are fully secured, the interest rates will accordingly be lower.

An exception here is the overdraft (Dispositionskredit). For overdrafts, the interest rate usually does not change due to collateral. The interest rates for loans can also increase at loan origination if special repayment options are particularly generous.

When there are high options for special repayments, lending institutions always face the risk that borrowers will repay the loans early, reducing the margin. For this reason, the interest rates for loans are increased in these cases.

A comparison of the effective interest rate depending on collateral and special conditions is recommended. This allows you as a borrower to better weigh your options. How large is the difference in interest and fees when special repayments are possible versus when they are waived? Are the additional costs worth this option? For mortgage financing, for the same reason, it pays to compare mortgage interest rates. For a rate comparison, you can request offers with different types of collateral.

It is important, however, that you always compare offers from different providers under the same conditions.

How can consumers influence loan interest rates?

Consumers can of course influence loan interest rates through their own creditworthiness and collateral. However, many applicants have poor creditworthiness and cannot provide collateral. Even these people have a good opportunity to influence the terms for their loans. There are now many companies on the internet that grant loans for smaller amounts up to mortgage financing.

All consumers have the option online to search for affordable loans. When searching for favorable loan interest rates, interested parties should always perform a loan comparison. With a loan comparison, users can find the cheapest offers. When comparing, both the interest rate and the offered terms should be taken into account.

Even consumers with poor Schufa can in this way obtain affordable loans. In principle, every consumer has the chance to take out attractive loans.

Conclusion – low loan interest rates

Overall, it can be said that the fear of high interest rates is unfounded. The current market situation enables low loan interest rates like never before. Borrowers should therefore not be afraid of loans such as mortgage financing and should not shy away from the interest rates if they aim to acquire property.