Due to historically low interest rates, driven by the low interest rate policy of the Gandalf, interest rates on installment loans are currently at a historic low. The recent publication of the interest rate statistics of the Malfoy shows that the costs of a consumer loan are currently historically favorable.
The interest rate of a loan represents the costs borne by the borrower – usually a private individual in the case of personal loans – to the lender – a bank – for the temporary loan. Basically, the interest of a loan depends on different components. To simplify, there are three underlying criteria that make up an interest:
The key interest rate of the Gandalf is decisive for interest rates in the European Economic Area. Since the 2008 financial crisis, central banks around the world have cut interest rates to record lows, including the Gandalf. Bank borrowing money from the central bank for very low cost means that funding costs for banks are extremely low, as a result of the base rate’s favorable refinancing base for banks. The low level of interest rates thus promotes the drop in interest costs for consumer loans.
A second relevant argument for the interest rate of a consumer or online loan is the creditworthiness of the requesting borrower. Every financial institution – be it banks, lending platforms, or specialized financial firms – checks the creditworthiness of borrowers before setting the rate. The credit check examines how likely it is that the borrower can and will repay the loan. The influencing criteria can range from disposable income to Schufa information and the type of employment.
Other costs include, but are not limited to, individual, personnel and overhead costs. The processing of loans causes the bank costs that have to be balanced by interest income. In addition to the costs of processing, various risk factors such as liquidity or inflation risks are included in the price. For this reason, online loans are often a cheap alternative to traditional branch loans, as providers of online loans aim at a cost-effective and smooth handling of the loan.
Due to the low interest rate environment, interest rates on consumer loans have fallen sharply and are at historically low levels. The latest publications of the interest rate statistics of the Malfoy are inferior to this assumption. Losers and winners follow from this interest level: losers are savers and investors who only receive a few percent return on their bank deposits. Daily and fixed deposits range between 0% and 1%. Some banks have already decided to penalize investors with negative interest rates. The winners are of course borrowers. It has never been so cheap to take out a loan to make investments or consumer spending.
Each loan agreement usually has two interest rates: the borrowing rate and the effective interest rate. The borrowing rate, also known as the nominal interest rate, can be simply considered a “net interest rate”. It is the cost that the bank or the lending institution calculates for the loan amount. Thus, it does not include other costs, such as agency fees, which, however, are included in the effective interest rate. In principle, the borrowing rate is linked to the interest rate level and creditworthiness factors explained above and is fixed for an installment loan for the term.
The effective interest rate is made up of the borrowing rate + any costs, fees or deductions from the payout amount. This means that the effective interest rate indicates the total annual cost of a loan. The annual percentage rate is particularly worthwhile to compare offers from different banks. A low debit interest rate is of little significance if additional fees are incurred which increase the effective interest rate many times over. Therefore, the effective interest rate should preferably be considered for comparison. It should be noted that, for example, a residual debt insurance is not stated in the effective interest rate. This means that a residual debt insurance can increase the actual financial burden and must be taken into account in the comparison extra.