Effective annual interest rate (APR)

The effective annual interest rate, also called "effective interest rate", refers to the total annual cost of a loan. It is always given as a percentage of the loan amount. It contains the debit interest and all costs and fees that are incurred with a loan.

The basis for calculating the APR is the borrowing rate. In addition, the level of the APR depends on several factors, such as repayment, term and the level of ancillary loan costs.

If you have to choose one of several loan offers, you should keep the APR in mind as an important criterion when comparing them, because this is the interest rate that you as a borrower actually pay for your loan.

The 2010 Consumer Credit Directive requires every lender to disclose the APR when advertising their credit offers. This gives interested parties the opportunity to realistically assess credit offers and compare them with each other.

For loans where the interest rate or other price-determining factors may change during the term of the loan, the effective interest rate is referred to as the "initial APR".

Debit interest rate versus effective interest rate

The debit interest rate, also known as the "nominal interest rate," is the interest rate that the bank charges based on the pure loan amount. In contrast, the effective interest rate takes into account all costs associated with the loan. In simple terms, the borrowing rate is the fee that the bank charges for the money borrowed.

The amount of the debit interest rate depends on the general interest rate level, the amount of the loan, the term, the intended use and the creditworthiness of the borrower.

The difference between the target interest rate and the effective interest rate depends, among other things, on the term of the loan: The difference is higher for short terms, because the ancillary costs are then spread over a shorter term and have a greater impact.

The borrowing rate is not suitable for comparing loan offers because it does not include many costs.

The two-thirds interest rate

The amount of the annual percentage rate of charge depends, among other things, on the creditworthiness of the borrower. However, creditworthiness-related interest rates are difficult to compare with each other. For this reason, the legislator has stipulated that credit providers must always quote a two-thirds interest rate when advertising an installment loan with a creditworthiness-dependent interest rate. A bank's two-thirds interest rate indicates the APR at which two-thirds of all customers receive a loan from that bank.

The two-thirds interest rate thus gives an important indication of the APR at which one can realistically obtain a loan from the respective bank. However, you will only find out which interest rate you will ultimately receive after the bank has checked your application.

Factors determining the price of the APR

The effective interest rate takes into account the price-determining factors from the regular credit history. However, since the loan agreements of the various banks may provide for different costs and fees, the price-determining factors are also not always the same, but may differ, depending on the type of loan agreement. For example, in the case of construction financing, there are more cost items than in the case of a normal installment loan.

The following price-determining factors are usually included in the APR:

• Debit interest rate
• Loan amount
• Duration of the fixed interest rate
• Fees (z. B. closing or account management fees)
• Discount (disbursement rate at the time the loan is granted)
• Creditworthiness of the borrower
• Installments for repayment of the loan amount (net loan amount plus. Cost)
• Interest and repayment settlement dates
• Contributions for residual debt insurance (only if the bank requires you to take out residual debt insurance)

The following factors are not included in the effective interest rate:

• Appraisal fees (appraisal costs or appraisal fees)
• Partial disbursement surcharge
• Notary fees
• Contributions for residual debt insurance (if the borrower has taken out the residual debt insurance by his own decision)

Processing fees for lending have been illegal since October 2014 and may therefore not be charged.

The repayment rate influences the effective annual interest rate

One factor that can affect the APR is amortization payments. Here, the point in time at which the bank offsets the repayment portions plays a role. If repayment portions within the loan installment are offset late, the borrower pays interest to the bank for the period until offset for loan portions already repaid. This increases the effective interest rate. So it's worth checking the loan agreement to see if the time of interest calculation coincides with the time of repayment.

Calculation of the effective interest rate

There are different methods to calculate the effective interest rate. In most cases, the so-called uniform method is used for this purpose: