Effective annual rate and borrowing rate: comparing loan offers properly

In short: The borrowing rate (Sollzins) is the plain interest rate you pay on borrowed money. The effective annual rate (effektiver Jahreszins) also includes other compulsory costs and therefore shows better what a loan really costs per year.

In more detail: Because the effective annual rate is calculated according to uniform legal rules, it is well suited for comparing loan offers from different lenders. For your decision, however, the term, total costs and contract conditions also matter.

In detail

• Borrowing rate: It states what percentage of interest is charged per year on the amount currently borrowed; it used to be commonly called the nominal rate.
• Effective annual rate: As well as the borrowing rate, it includes other costs that are necessarily tied to the loan, and it takes into account when payments are made.
• Stated in advertising: Anyone advertising loan interest rates to consumers must also state the effective annual rate under the rules of the German Price Indication Ordinance (Preisangabenverordnung), usually in a representative example.
• “From” rates: Advertised rates marked “from” often only apply to customers with a very good credit rating; you only find out your personal rate after the credit check.
• Optional extras: Optional insurance, for example payment protection insurance (Restschuldversicherung), is often not included in the effective annual rate but can make the loan considerably more expensive.
• Look at the total amount: A low monthly instalment sounds tempting, but over a long term it often leads to higher total costs; so also compare the total amount of all payments.
• Fixed-rate period for mortgages: With property loans it is also important how long the interest rate is fixed and what applies afterwards.
• Fixed and variable: A fixed borrowing rate stays the same for the agreed period, while a variable rate can change, as is usual with an overdraft, for example.
• Check calmly: Ask for the pre-contractual information, compare several offers and get advice if you are unsure, for example from the Verbraucherzentrale (consumer advice centre) (verbraucherkredit-grundlagen, zinseszins).