What is meant by effective interest rates and borrowing rates?

Debit interest, effective interest rates and possibly even 2/3-Zins – the different terms quickly make for credit newcomers confusion. 

Consumers who wish to take out a loan for the first time are often confused by the many different interest rates on loan offers. Do not be confused, loan offers are actually quite easy to understand.

The debit interest rate indicates the actual interest costs incurred

The debit interest rate indicates the actual interest costs incurred

How high the pure interest, which will accrue on the taken up amount, can be read from the borrowing rate. Until the amendment to the so-called Good Credit Directive in June 2010, these pure loan interest rates were often referred to as nominal interest rates.

If you borrow a loan with a fixed interest rate for the entire repayment period, this is called the borrowing rate. The interest rate is tied to the term in this case, which provides the borrower with a high level of planning reliability regarding the costs. He knows from the beginning how high the interest cost of his loan will be. The counterpart to this is the variable debit interest. While there is a chance of lower interest costs if it falls over the repayment period, it can also rise, making the loan more expensive.

The debit interest rate in the loan offer is not necessarily the actually incurred interest rate

The debit interest rate in the loan offer is not necessarily the actually incurred interest rate

How high the borrowing rate for your loan ultimately turns out depends not only on the general interest rate level, which is based on installment loans, but also on individual factors. In general, the more creditworthy you are, the lower the borrowing rate will be, as the risk to the bank is lower.

The actual debit interest is therefore an individual matter. The interest rate indicated in loan offers is the 2/3 interest rate. He specifies the debit interest, to which two-thirds of the customers would normally receive the loan offered. It is therefore only a calculated size for loan offers, but gives you a good clue. However, you should be aware that a lower credit rating will probably give you a higher interest rate.

Annual percentage rate as the decisive benchmark for loan offers

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The indication of the 2/3 interest rate in loan offers has been required by the Good Credit Directive since 2010 throughout the EU. It aims to prevent customers from being irritated by the lowest interest rate or phrases such as “available from”.

Also contributing to consumer protection is the compulsory indication of the annual percentage rate of charge, which is also laid down in this Directive. The effective interest rate indicates the total annual cost of using a loan. In general, in addition to the debit interest additional costs for a loan, for example, agency fees.

These total costs are taken into account in the effective interest rate. Since the annual percentage rate of charge calculation is precisely specified in the Good Credit Directive, this size allows you to compare credit offers from different banks. However, there are costs that are not included in the effective interest rate. These include optional fees, such as for special repayments or the cost of a residual debt insurance.