Interest rate on the loan: decisive for the credit costs

 

If a person deals with the topic of credit, one topic will be of particular importance for him – the interest rate. The interest rate is decisive for how expensive or cheap a loan will ultimately become over the entire term. This value is always set in percentage points and gives the borrower information about which loan is ultimately the most optimal for him.

The calculation of the interest rate

The calculation of the interest rate

The interest rate is often referred to as the rate of return, which can lead to slight confusion for the borrower. However, there are often cases in which the rate of return and the interest rate are clearly distinguished from one another and a distinction is made between the values. In order to understand how the interest rate is formed, the borrower must first think of a relatively understandable formula. This is as follows:

Interest rate = capital multiplied by interest rate numerical value multiplied by interest days divided by daily dividers.
What sounds complicated at first is understandable when viewed in detail and makes it easier for the borrower to understand how the interest rate is formed.
As a basis for measuring the interest rate, banking is generally used annually, i.e. annually. However, in order to be able to use the interest formula correctly, the daily divider is important – especially for loan periods of less than one year. There are different calculation methods, whereby the so-called banking year consisting of 360 days is the usual practice. Only for loans in Great Britain is a calendar year consisting of 365 days assumed. However, the first day of borrowing is usually not included in the interest calculation.

types of interest

types of interest

In banking – when lending to private individuals – a distinction is made between two different types of interest. These are the nominal interest rate and the effective interest rate. The base rate of the Lite Lender is used as the base rate.

A nominal interest rate is the so-called pure interest rate, which is the basic calculation for the interest amount. The nominal interest rate is based on the year and it is the pure amount that is due for the repayment of the loan. It does not include the bank’s method of calculation or the ancillary costs arising from the loan. At the monthly loan installment, the borrower will pay the amount consisting of the fixed repayment and the nominal interest rate.

The term effective interest rate includes all annual costs arising from the loan, which are related to the total term of the loan. The amount of the effective interest rate is determined from the nominal interest rate, the fixed interest rate, the repayment and the payment rate.

The effective interest rate is of little help when comparing different loan offers, since only offers with the same fixed interest rate can be compared with each other. However, since other factors such as loan fees, repayment-free years, nominal interest and processing fees are included in the mathematically correct loan comparison, it is difficult to determine the optimal loan with the most favorable terms based on the effective interest rate. However, the effective interest rate should make this possible for the borrower. Therefore, banks are also legally obliged to state this interest rate in their loan offers. It is also important for the borrower to know that the effective interest rate only includes the actual values ​​and no estimated costs such as commitment interest, credit account management fees and partial payment surcharges and a possible prepayment penalty. In contrast, however, it gives a good percentage overview of what the loan will cost the borrower in a year, provided that the borrower carries out the contractually stipulated period for the loan repayment in accordance with the contract.

What few borrowers know is that they don’t even have to go to the bank to get a loan. Large electronics retailers advertise that they offer financing at extremely low interest rates. Anyone who has taken advantage of this offer will know that it is nothing more than an installment loan, which can ultimately be more expensive than the actual product was worth. Especially if there are currently no special offers for large purchases in the respective market, it is extremely important to compare the interest rates exactly before signing, since these electronics markets usually work with certain banks, whose interest rates can be much higher than it would have been the case with the house bank or another smaller bank. A lot of people still believe that this kind of financing is done through the electronics market, which is ultimately a misconception.

It can often happen that banks advertise with particularly low interest rates in order to attract as many borrowers as possible. In the past, however, it often turned out that the actual loan interest was significantly higher than what was advertised. Ultimately, these increased costs were clearly reflected in the percentage points of the loan interest rate, so that a large proportion of the borrowers did not benefit from these favorable loan conditions.

Fortunately, the legislator has reacted to this fact and, with Directive 2008/48 / EC for consumer credit, Section 6a PAngV, the so-called advertising for loan agreements, has passed a regulation that banks are only allowed to advertise at the lowest interest rate, which two thirds of all borrowers really do Could claim. This was due to the fact that at many banks the principle of credit-dependent credit interest still prevailed when determining the loan interest rate, which was however prevented. Nowadays, when it comes to lending, the interest rate is largely standardized so that private customers can benefit from favorable loan terms.

In advance

In advance

Incidentally, it is worth paying close attention to the news and European economic developments before taking out a loan. Especially in the time of the euro crisis, which is still prevailing economically, the Lite Lender lowered the key lending rate, which had a noticeable impact on the lending rate. So if you wanted to take out a loan for a larger purchase, you should do this in times of economic crises, because in this way a lot of cash can be saved through the low interest rates.

However, it remains questionable whether the banks will actually grant these loans in the end, since they too have become economic entities that ultimately aim to make a profit. However, it can help a lot if you already have a good knowledge of the loan interest rate and its importance, as well as the way in which it is ultimately formed, before borrowing. As in almost every area of ​​life, it is worthwhile, especially with loans, to make a comprehensive comparison and do some careful calculations in order to ultimately get the best conditions for yourself.

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