Everyone has at one time or another heard the term effective interest rate. But what is it really? According to the statistics, it is approx. 65% of consumers who do not understand what is meant by effective interest rates. We will try to clarify what the effective interest rate is, why it is used and how it is calculated. In addition, let’s say a little about what you as a borrower should think about when taking out a loan.
What is effective interest rate and how does it differ from nominal interest rate?
The effective interest rate is the total cost of a loan, including interest and fees. Thus, the actual price paid for a one-year loan. The consumer authorities describe this as the actual comparable price between different loans. The interest rate that is part of the effective interest rate is called the nominal interest rate.
Nominal interest rate is only the cost of the loan that the borrower pays. So what one would often call interest. For example, if you borrow 100,000 with a 5% interest rate, the annual nominal interest rate is USD 5,000. That is, USD 415 per share. per month, calculated 5000 dollar / 12 months.
Why is effective interest rate applied?
Effective interest rates are a good tool for a consumer who wants to compare the annual price of different loans. It becomes extra important to be aware of effective interest rates on small loans and sms loans / consumer loans, as the cost of such loans can vary widely – depending on the repayment period, the amount of the loan and various fees such as setup fees and administration fees.
Often the nominal interest rate is specified in the information to you as a consumer. But the lender is also required to inform about the effective interest rate, especially in the loan agreement. That obligation also extends to advance information and marketing.
How do I calculate effective interest rates?
Calculating the effective interest rate can be difficult and something you do not want to try. Fortunately, there is help getting online where they calculate the effective interest rate automatically, and you as a consumer just need to fill in the amounts. On our website you can clearly see what the effective interest rate will be at different interest rates, amounts and repayment times.
For example, it looks like you are applying for a loan of USD 65,000 and receive an interest rate of 13.50% at a repayment period of five years: the effective interest rate will then be 17.09%. Costs that also come with the loan are a monthly fee of USD 65 and an establishment fee of USD 595. Total amount for repayment is USD 94,500, ie USD 1575 / month.
Which loans have high effective interest rates?
In the free market, there is free pricing for loans. This means that the lender can decide which interest rate and which fees to apply. Normally, small loans such as SMS loans tend to have high fees in relation to the size of the loan amount. Other types of loans with high effective interest rates are installment loans and car loans, where the fees associated with the loans are often very high. A good alternative to these loans, to lower the effective interest rate, is consumer loans.