Loan interest (interest on a loan) is basically the consideration that the borrower pays to the lender for lending the loan amount. Interest on a loan must be repaid to the lender in addition to the amount borrowed. The emergence of interest is tied to many theories. The theses about the occurrence of interest range from inflation compensation to compensation, since the lender cannot immediately spend his borrowed money himself.
The interest is the cost factor that arises for borrowing money
If you want to represent this in a simplified manner, the interest calculation is carried out according to the following facts: The basis is the risk-free interest rate, which is determined over the same term. As a rule, government bonds with the best credit rating – for example, Germany – are used as the basis for this.
A premium is added to this interest rate, which in turn is referred to as margin in technical jargon. The margin is made up of two parts. On the one hand, there are the processing fees that apply for applying for a loan and the profit. On the other hand, the individual risk of the borrower represents the other part of the margin. The risk determination for each bank is based on different criteria. This includes personal characteristics such as the age and occupation or income of a borrower. The costs still incurred are then determined in the effective interest rate. This effective interest rate also includes costs that are incurred for the administration of the loan and therefore do not represent a profit for the credit institution.
In order for the costs of the loan to be possible with the offer of a competitor, it is not enough to compare the loan interest rates. The real costs of the loan are shown only by the effective interest rate. Banks are required by law to state the effective interest rate for advertising loans. The fact is that overall low loan interest, i.e. debit interest, for a loan due to high ancillary costs for the closing fees or commissions for credit intermediaries or also due to the charging of account management fees no longer make this loan seem really cheap. In general, interest rates on loans follow the key interest rates published by the Private Bank.
Compare interest rates
Many people rely on intuition in many things. This is correct in some situations, but not a good solution when comparing loans. When concluding a loan contract, only facts count and intuition should not matter. A serious and objective installment loan comparison is the better solution for finding the right loan because it enables the right providers for the loan to be found on the basis of comparison results. Only a correct comparison of loans, which includes a comparison of effective interest rates, can ensure that the contract for the loan does not cost more than necessary.
In the case of loans, in particular, the most profitable business for banks, the providers differ considerably in their prices. Comparisons show that the banks, which predominantly or even exclusively offer their products on the Internet, are significantly cheaper when it comes to interest rates. More and more direct banks are now outclassing branch banks in terms of credit terms. In general, loans are very popular with consumers. This is not surprising, because consumers are looking for financing options that enable a design that adapts to their own financial needs.
An installment loan offers the best conditions
As a rule, banks offer loan terms of between one and seven years. Special repayments are also common today and are more the rule than the exception. Classic loans are between 1,000 and 50,000 USD. This provides flexible options for borrowers with regard to the amount of the loan in order to make the loan as individual as possible.
Due to the now very high flexibility of the offers on the credit market, the right loan can be implemented for practically every prospective loan. It is important, however, to make an installment loan comparison before concluding a contract. Loan rates differ widely, so comparing them makes sense. The easiest way to carry out the installment loan comparison is on the Internet. Here it is possible to compare a large number of providers and thus to get an overview of the conditions of the individual money lenders.
Experience shows that the loans that are offered on the Internet are often cheaper than those of the established banks. In addition, an applicant has already committed himself to the bank by going to the bank branch for the loan application and has therefore taken all comparison options. The reasons why established banks are more expensive to lend are because the higher interest rates on the branch banks’ own costs have to be covered.
Credit intermediaries can make the price of a loan higher
This is because a comparison is made by the credit intermediary with regard to the offers of individual banks. However, the credit intermediary can pay for this service with a commission. Even if the credit broker ultimately finds an offer that is very cheap, the costs incurred for the commission can put the cheap offer back into perspective. The costs for the intermediary are added to the total cost of the loan and so the effective annual interest rate of the offer can be put into perspective even if the offer is initially cheap.
Instead of relying on a credit broker to achieve the desired loan, it is recommended for prospective creditors to take advantage of the opportunities that their own loan comparison via the Internet brings with it while simultaneously concluding the contract on the Internet. The advantages for the borrower are that the cost of the loan does not ultimately increase through your own research.
A loan prospect can independently get a market overview and then select the loan that meets their own individual needs. Direct banks, in particular, are proving to be more and more advantageous when it comes to borrowing, and this is due to the low lending rates that these banks call on. The advantage of direct banks is that they do not have to finance an expensive branch network so that these costs do not have to add to the loan interest. Many direct banks pass these savings on to customers in the form of low lending rates.
Customers recognize the advantage and so more and more loans are taken out directly on the Internet. Direct banks very often occupy the best places when comparing loan interest rates because, on the one hand, they offer installment loans on favorable terms and, on the other hand, they also offer the customer excellent service. In addition, online banks also offer good complementary products to the loan, i.e. cheap checking accounts with simple online account management.