Online and installment loans
Now pay attention to the effective interest rate
Interest rates are the be all and end all when it comes to loans – at least that’s what you’d expect, if you look at the percentages of banks and banks that advertise weekly with new offers. But here, too – as with any online comparison – it is important to take a closer look in order to get a clear view: In order to be able to compare different loans correctly, one should know the difference between nominal and effective interest rates.
When a credit appears to indicate a low interest rate , it is often the nominal interest rate, which is merely the interest rate used to calculate the loan. However, what is completely eliminated with the nominal annual interest is the often numerous and strongly fluctuating from provider to provider additional costs, which make an effective comparison of offers and terms almost impossible.
By contrast, the annual percentage rate of charge is much more meaningful, because with its help one can at least approximately calculate the actual “price” of a loan. Reason for this: In the effective interest rate, in contrast to the nominal interest rate, all agios, processing fees or termination fees are added and added to the loan amount. So an interest rate can be determined, which in fact has to be paid, so effectively. Only when one compares the effective annual interest rates of individual offers, one can speak of a certain objectivity and transparency in the determination of favorable loans.
Incidentally, even though it has been required by law for 10 years that a installment loan offer must be made only by stating the effective interest rate, it is nevertheless advisable to also pay attention to other credit terms. Neither the fees for valuation and the account management nor possible credit insurance are included in the calculation of the effective interest rate. Also possible redemption pauses are not taken into account. Only those who include these factors together with the APR in their credit calculations know the reasonable cost of an installment or online credit estimate reasonably.