It is the basic rule of the financial world: Whoever lends money and thus takes out a loan , has to pay a certain percentage of the loan amount in interest as a premium for the loan. As a result, when choosing a suitable loan, clients look primarily for the level of the interest rate and determine whether it is an expensive or cheap loan. However, if you look at the loan offer in detail, you will often find that the interest rates are often 2 interest rates and sometimes significantly different from each other. It quickly becomes clear that obviously interest rates are not equal to interest. However, in order to be able to really objectively assess loans in terms of their interest rates, the differences in interest rates should be known. So we would like to give a little explanation with this article.
Financial institutions distinguish between two Different Types of Interest Rates in the Credit Business: So-Called Debit Interest Rates (which were nominal interest rates until 2010) and the generally better-known effective interest rates. The difference: The debit interest rate only indicates the amount of interest on a loan. If the inflation rate has already been deducted from the interest rate, this is the borrowing rate. Other costs incurred for the loan are not listed, so this is effectively pure interest. The definition of the better known APR for loans, on the other hand, does not appear. The effective interest rate also includes the possible costs of a loan. In addition to possible additional costs, for example through credit brokerage as well as through processing fees, the credit period, interest payment dates and other price-determining factors also influence the calculation of the annual percentage rate of charge. All these factors explain the significant percentage difference between the borrowing rate and the annual percentage rate of charge. These differences in individual interest rates should therefore be known to consumers who wish to take out a loan, because only then can the individual loan offers be valued correctly.
But only the knowledge about the differences between the two types of interest in a credit comparison is not sufficient, because it is also important to consider in a comparison that the other required parameters are correct. Only if the monthly rate, the duration of the fixed interest rate and the loan amount are the same, is it sufficient to look at the effective interest rate for a comparison. But care: Any costs for residual debt and other insurance, which banks like to convey in combination with a loan, are not included in the calculation of the APR.