How are lending rates calculated?
Loans and loans are always paid a special interest rate, which represents the cost of financing. A distinction is made between the fixed borrowing rate and the effective interest rate . The tied borrowing rate results from the general interest rate level on the credit market.
It is influenced by the Bank’s internal lending criteria, the creditworthiness of the borrower, the loan amount and the duration of the financing. The effective interest rate also contains a number of other criteria, which are reflected in the costs.
Calculate debit interest
The borrowing rate of a financing is usually stated on the basis of one year. Advantage: That makes the loans of different providers comparable. The interest is paid by the borrower, but usually on a monthly basis.
Sometimes longer payment periods are also compatible (quarterly, twice a year, annually). Interest rates are usually included in the loan installment. Our tip: Regular, monthly installment payments are the easiest way for customers to process.
If you want to calculate the percentage interest rate, the following formula requires the amount of capital, the period and the interest rate.
The interest is calculated on the basis of the existing remaining debt. If a borrower pays back a certain amount each month, the remaining balance is reduced month by month as the basis for the interest calculation.
While the share of interest on the loan rate is thus getting lower month by month, the repayment of the loan increases while the loan rate remains the same. For the borrower, the monthly calculation and payment of the borrowing costs compared to the annual payment gives a slight financial advantage.
The period used by the Bank for its calculation is 30 days for one month, 90 days for a quarter and 360 days for one year.
Effective interest rate on loans
The effective interest rate of a financing consists of the tied interest rate and other factors. Thus, as mentioned above, the processing fee charged to the bank for providing the loan is included in the effective interest rate. Also a possible discount (a deduction from the starting amount) is considered in the effective interest rate.
The same applies to the frequency of interest payments and the term of the loan, including the chosen fixed interest rate. On the other hand, the effective interest rate does not include account maintenance fees, the preparation of an appraisal report for real estate financing, the provisioning interest requested by the bank and brokerage commissions, if these are applied.
Even a residual debt insurance may not enter into the effective interest, it must be reported separately. Thanks to the factors taken into account, the effective interest rate allows a direct comparison of the available offers, because it summarizes the incurred borrowing costs in one key figure.
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Interest calculation for investments
When calculating the interest, the textbook distinguishes between the credit interest and the debit interest. The credit interest is granted by the bank for investments, eg. B. for money market accounts.
The investor makes an investment over a certain period of time and receives a corresponding interest in return. A distinction must be made between the nominal credit interest and the effective interest rate.
While the nominal interest rate results from the general level on the interest rate market, the effective interest rate contains further factors beyond that. The credit interest is usually given per year to ensure better comparability of the investments.
Under-year credit of credit interest – compound interest effect
As we have seen, the credit interest does not necessarily have to be paid out each year. It can also be credited at shorter intervals. So there are a number of providers who make a quarterly or even monthly credit of interest .
For investors, this means one thing above all: they benefit more from the compound interest effect. The interest-rate effect means that credited interest will pay interest again in the next period. If the interest is granted on a monthly basis, the investor participates a little more in the compound interest effect.
The interest credit on monthly or quarterly credit tends to be slightly higher due to the cross-compounding effect. While the annual rate of interest relates to the period of one year, it is calculated on the basis of the chosen period of three months or one month if the payment is made during the year.
Usually, the calculation uses one year with 360 calendar days, one quarter with 90 days, one month with 30 days.
Effective interest rate on investments
After all, there is still the effective interest rate on investments. It too is usually specified over the period of one year and is intended to ensure the comparability of the most diverse plants.
The effective interest rate not only includes the nominal credit balances granted, but – as mentioned – other factors. For example, processing costs for account opening and fees for account management are included in the effective interest rate.
But also an annual or monthly interest credit and possible bonus payments, if the provider provides these, because a certain minimum deposit is made in a fixed period. Ultimately, the effective interest rate is thus the key figure that is crucial in the direct comparison of investments.
Note the effective interest rate
Overall, both when looking at the credit interest and when comparing credit costs, the effective interest rate per annum serves as the basis for quickly comparing existing offers.
The nominal interest rate must also be taken into account, as it essentially results from the prevailing interest rate level on the market. In addition, if you have the choice as an investor or borrower, a monthly credit interest payment or monthly interest payment may tend to be preferable.