If you are looking for a loan, you will come across the APR. We explain what this interest rate means, how it differs from the borrowing rate and whether it is useful as a benchmark.
Looking for a cheap loan can be very confusing: Debit interest, nominal interest, APR – yes, what now?
We’ll show you what the APR is all about, why you should only compare loans with it and how exactly it is actually calculated.
What is the APR?
At the Price of loan offers it is the same as with other products: it is available in a net and gross version, so to speak.
Net means the price without additional costs such as taxes or fees, i.e. only the money that arrives at the bank. The gross price, on the other hand, is higher because it includes these costs. And it is the price that you as a borrower ultimately have to pay.
This gross price is called for loans Effective interest rate or short Effectively. It is given as a percentage of the loan amount and gives the actual loan costs incurred per year on – provided the interest rate is fixed during the term. If this is not the case, there is only one so-called initial APR.
In short, the effective interest rate is the Borrowing rate, sometimes too Nominalzins called, plus additional costs. Borrowing rate is the rate at which you borrow money from the bank.
How do I calculate the APR?
The effective interest is usually with the so-called Uniform-Methode calculated. The formula for this is:
(Loan cost / net loan amount) × [12 / (Laufzeit in Monaten + 1)] x 100 = effective annual interest rate
The Credit costs result from the total repayment (loan amount x term x debit interest) minus the disbursement amount. The Net loan amount results from the nominal loan amount minus the loan costs.
- Example: Let’s assume that the loan costs are 15,000 euros, the net loan amount is 100,000 euros and the loan term is ten years, i.e. 120 months. This results in an effective interest rate of (15,000 euros / 100,000 euros) x [12 / (120 + 1)] x 100 = 1.49 percent.
Attention: This formula only allows an approximate calculation. The result may differ from the effective interest rate actually offered by the bank.
What is the difference to the borrowing rate?
The Debit interest is the basis for calculating loans. It is the interest rate at which you borrow money from the bank. Its amount depends not only on the general interest rate level, but also on the Loan amount, the running time, the Usage and yours Creditworthiness, so yours credit-worthiness.
The borrowing rate is not suitable for comparing loan offers because it does not contain many costs. For this reason, the Consumer Credit Directive in 2010 made it mandatory for lenders to state the effective interest rate. This is more informative, but does not yet contain all the costs (see below).
What is the difference to the two-thirds interest rate?
The Two-thirds interest indicates how much a loan can cost for at least two thirds of the borrowers. The bank must therefore grant at least two out of three customers the loan at this or a lower interest rate.
With the two-thirds interest rate, you can get an idea in advance of the range in which the interest rates of different banks move. You will first find out whether you will actually receive this interest or whether you will count towards the remaining third after the credit check by the bank.
The background to this interest rate is that banks are legally obliged to pay a representative example to specify. You must specify the two-thirds interest rate for both the borrowing rate and the APR.
Good to know: There are also loans where the interest rate does not vary according to the customer’s creditworthiness, but is the same for everyone. The creditworthiness is then also checked, but it only decides whether the customer gets a loan at all – but not about the amount of the interest rate.
Does the APR include all costs?
No. Although the legislature required banks and savings banks in 2016 to include more costs in the calculation of the APR than was previously the case, the effective interest rate is still not a complete package.
In the case of construction financing, for example, the costs for Uses, Land register entry and Commitment interest added. Also a possible one Prepayment penalty, Account management fees or contributions for a possibly existing one Payment protection insurance are not included in the annual percentage rate of charge.
By the way: Since October 2014, banks are no longer allowed to charge processing fees for loans. If these are still listed, they must always amount to 0 euros.
When is the APR comparable?
In general, the lower the APR, the cheaper the loan. However, this is only comparable, even if the other conditions are identical are – i.e. loan amount, term, fixed interest rate and repayment.
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