## The effective interest rate on a loan

When you start financing, there are usually always costs. These are calculated in the form of an interest rate on the loan. In this article, you will find out what is behind the effective interest rate, how it is calculated and what the difference to the borrowing rate is.

## What is the effective interest rate?

Interest is the cost of a loan, which is estimated for the provision of the loan amount by the bank. In addition to the actual interest on the loan amount, all other costs are included in the effective interest rate. These can include:

- Completion of placement commissions.
- Account management fees.
- Other fees.

The best way to compare loan offers based on the effective interest rate is that it includes all the costs involved. Before taking out a loan, the effective interest rate on the loan must be communicated to the borrower exactly. This is what the Price Indication Ordinance (PangV) wants.

### Where does the effective interest rate come from?

The banks cannot set the effective interest rate arbitrarily and arbitrarily. It is always based on the currently applicable key interest rate of the European Central Bank (ECB). This indicates what interest banks have to pay when you borrow from the ECB.

So if the key interest rate falls, the lending rate also drops. In the current low-interest-rate phase, it is therefore particularly favorable to take out a loan. This situation can change again when interest rates rise in the market.

## This is how the effective interest rate is calculated

In most cases, the so-called uniform method is used to calculate the effective interest rate:

begin {pmatrix} dollar {loan costs} {net loan amount} end {pmatrix} * begin {pmatrix} dollar {12} {term + 1} end {pmatrix} * 100

For a loan of $ 10,000 and a term of 48 months with a loan cost of $ 600, the following calculation results:

begin {pmatrix} dollar {600 $} {10000 $} end {pmatrix} * begin {pmatrix} dollar {12} {48 + 1} end {pmatrix} * 100 = 1.47 %

## What is the difference between the borrowing rate and effective rate?

If you want to take out a loan, you will always find two interest rates in the offers:

- The borrowing rate
- The effective interest rate

The difference between the two interest rates is that the borrowing rate, formerly also known as the nominal interest rate, only outputs the pure costs for the provision of the loan amount. So he says what the bank is asking to lend you money. The debit interest rate is only used to compare the interest rates requested.

This contrasts with the effective interest rate. In addition to the interest, this also includes all other fees that are payable in the course of borrowing. The total cost of a loan can therefore only be compared in a loan comparison based on the effective interest rate.

## How can different effective interest rates be compared?

On loan experts, you will find different offers and interesting facts about the topic of loans. No matter whether you need a loan for your master school, a new kitchen or dentures. To be able to compare the different offers, simply enter your required loan amount, the desired term and the corresponding purpose.

You will then receive an overview of all providers of a loan according to your ideas, including the borrowing rate, the effective interest rate, and the monthly repayment rate. You can use the overview to compare the effective interest rates of the individual providers. The so-called 2/3 interest rate is always given here.

### What is the 2/3 interest rate?

The actual interest rate that the bank charges you on a loan depends on various criteria. The decisive criterion is your personal credit rating. Since your personal interest rate cannot be specified immediately in a loan comparison, the so-called 2/3 interest rate is given here as a reference value.

This is the interest rate that 2/3 of the borrowers actually receive. If your credit rating is better, you can benefit from a better interest rate. The reverse is true.

### Conclusion on the effective interest rate on a loan

The effective interest rate includes all costs associated with borrowing. In contrast to the borrowing rate, it is, therefore, more suitable for comparing different loan providers. The effective interest rate of a loan must be communicated to the borrower exactly before the contract is concluded.

Using our loan comparison, you can find the loan that offers the best effective interest rate. In the overview, the banks indicate the 2/3 interest rate for a first orientation, since your personal interest rate depends on a later credit check.