Anyone who needs money to make unplanned or costly purchases can borrow the amount required from the bank or a financial service provider as a personal loan against payment of interest. Such a loan is made up of various components.
First of all, the amount is decisive, the so-called payout amount. This is repaid in constant installments within a specified period. During this time, interest is payable, which increases the total repayment amount compared to the payment amount. The amount of the loan interest is therefore the decisive factor for the cost of a loan, but here too the following applies: Interest is not equal to interest.
Interest rate trends for personal loans
Evaluation of the interest on consumer loans based on the annual percentage rate for the period 2003 to 2013. Percentages were used for the evaluation, which were collected on average for contracts with a variable interest rate.
Nominal interest rate
The nominal interest rate is understood to be the pure interest on the loan without taking into account further credit costs. It is set by the bank and is roughly based on the key interest rate of the Cream Bank. This key interest rate determines the conditions under which the banks can raise money on the capital market. The lower it is, the cheaper it is for banks to obtain fresh capital, which is why they can pass on this advantage of low lending rates to their customers. As a rule, the following applies:
Low Lite Lender key interest rate = low nominal interest rate
The difference between the base rate and the nominal rate is the turnover that the bank generates. As the customer may need a loan at any time, changes to the key interest rate, especially in the event of interest rate cuts, are only passed on to customers slowly, as this can generate greater sales.
The fluctuation range of the nominal interest is between approximately 4 and 7 percent. Loan interest is always stated annually (per annum = pa) and, in the case of the nominal interest rate, also referred to as the borrowing rate or base rate.
Nominal interest rate not suitable for credit comparison
Different loan offers are very difficult to compare with one another using the nominal interest rate. This is mainly due to the fact that the cost of a loan is also determined by additional fees, surcharges and also the total term. A mere comparison of the nominal lending rates cannot provide information about the total costs.
Also with loan offers of the different banks one should always pay attention to the stated loan interest. Since the nominal interest rate is the lowest rate that can be stated, it is often used as a lure.
Effective interest rate
The annual percentage rate is much more meaningful in terms of credit costs than the nominal interest rate, because this also includes additional incidental credit costs. Since June 11, 2010, an EU consumer directive has been in force, in which the banks were obliged to list all additional costs and to indicate the effective interest rate. The purpose of the loan interest rate is to create more transparency and fairness on the credit market.
The effective interest usually includes the processing and agency fees charged by the bank.
However, account maintenance fees, special repayment costs, commitment interest or partial payment surcharges do not have to be included in the loan interest. Even though these costs generally only make up a very small proportion of the total cost of a loan and often do not even arise, special attention should be paid to this and, if in doubt, the bank should be asked directly how these costs are handled.
Residual debt insurance not included
Also not included in the effective interest rate is the optional residual debt insurance, which can always be taken out when taking out a loan. However, since the customer can also exclude them from the contract by signature, this is not taken into account in the calculation of the effective interest.
Representative of a credit comparison
In contrast to the nominal interest rate, the effective interest rate is a very good value for comparing different loan offers with one another, since the main costs are already taken into account when specifying these loan interest rates.
Sample calculation for the APR
The key data of an exemplary loan are:
- Borrowing (payment amount) = 50,000 USD
- Nominal interest = 5.00%
- Effective interest = 5.90%
- Term = 36 months
In this case, the monthly installment is $ 1,515.22 and the total loan costs (repayment amount – payment amount) amount to $ 54,547.92. The difference between the nominal interest rate and the effective interest rate is $ 690.12 and represents the fees charged by the bank.
Role of creditworthiness
Loan offers are usually made based on the borrower’s creditworthiness, with certain factors playing a role in lending rates. In addition to the entries in the so-called Credit Bureau file, the profession practiced and the income earned as well as the marital status are also taken into account. In practice, this means that a married teacher will most likely get better interest rates than a single young trainee.
Credit interest independent of creditworthiness
In contrast, there are loan offers in which the creditworthiness of the borrower is irrelevant. This is the case with car loans, for example, since the default risk for the loan is offset by the equivalent of the vehicle being financed. As a rule, such loans are cheaper than conventional financing.
Only for people who have a very good credit rating could it turn out to be a disadvantage to take out such a loan with non-credit interest. In such a case, it is worthwhile to complete the financing in the conventional (credit-dependent) way and to use it to pay for the item you want to purchase.
Other concrete factors influencing lending rates
The most important influencing factor are the entries already mentioned in the Credit Bureau file. Entries are always made here if, for example, open invoices or dunning notices have not been paid for a longer period. However, there may also be incorrect entries in the Credit Bureau file.
Assets to secure the loan
Those who are wealthy can use these assets as security for a loan to be taken out. Tied assets in particular (real estate, funds, shares, real assets) can be used to reduce the default risk by offering the bank as collateral.
Income – household bill
In addition to pure income, which is also a factor influencing lending rates, above all the freely disposable income that remains after deducting all current expenses is gladly checked. The greater this income, the more securely the loan is viewed by the bank. This procedure is also called budgetary accounting.
Age of the borrower
The age of the borrower also plays an important role. Here, the banks consider the default risk that increases with age due to the death of the borrower and therefore prefer people between the ages of 25 and 40, which may be reflected in a lower interest rate. In rare cases, the health of the borrower can also be taken into account for the same reason, especially since a loan can also be secured with appropriate insurance.
Personal and social position of the borrower
A similar calculation is followed with the question of marital status. Here it is assumed that a married borrower, ideally with children, has a more secure job than a single borrower, since many companies have a so-called social plan if the economic situation deteriorates, which particularly protects this group of people.
In general, the risk of job loss through the bank is carefully considered. The higher the risk, the higher the loan interest on the loan. If you have a permanent contract, you will definitely get a personal loan easier and with better terms than someone with a fixed-term contract or if you are still in the trial period. The situation is even better for certain professional groups, such as civil servants. The same applies to more highly qualified people, who can usually expect better interest rates on loans, since they generally have a higher and more secure income.
Rather rare, but nevertheless possible factors influencing loan interest are the place of residence and the personal appearance of the borrower. For example, addresses in socially weak areas are initially considered to be disadvantageous and other factors necessary to compensate for this flaw. Also, no lender can exonerate themselves that personal impressions, especially in direct contact, play an important role in lending. It may also be financially worthwhile to leave a well-groomed impression with credit advice.