How is the effective interest rate of loans calculated?
The effective annual interest rate (effective interest rate) is an important tool for loan seekers. With this value can be different offers with each other # be compared. In the effective interest rate, all costs of the loan are combined.
What is required by law?
The legal basis is Paragraph 6 (1) of the Price Ordinance. In addition to the loan interest, the effective interest rate also includes processing fees, agency commissions and the method of interest and repayment settlement.
Where are traps lurking in specifying the effective interest rates?
The legal guideline stipulates that the effective interest rate must be calculated for the entire repayment term. However, with fixed rates of 5 or 10 years, this is difficult to implement because the level of interest on follow-up financing can not be predicted.
Most financial institutions continue to expect the agreed interest rate. Thus, the same effective interest rate is shown as before. Attention: Savings banks and building societies have experienced problems in the past:
Effective interest rates of savings bank real estate loans partly misleading
As the magazine “magazinefix” already determined in 2011, was in some savings bank agreements, the agreement that the loan with variable interest continued to run, unless the parties agreed to the expiry of the fixed interest on a new fixed interest rate.
In the case of a clause in this regard, the Price Ordinance provides that the current interest on floating-rate loans will be used for the remaining term.
If the variable new interest rate is lower than the old interest rate for the fixed loan, the effective interest rate is below the borrowing rate. With the opposite constellation, the credit becomes more expensive.
Combined loans at building societies with inaccurate effective interest rates
In the case of composite loans from building and loan associations, the effective interest rate for the advance loan and the effective interest rate for the building society loan were both stated. However, the savings amount, the closing fee as well as a possible immediate deposit are disregarded, so that in this case the result will be falsified.
Which additional costs banks often do not take into account
Certain ancillary costs such as estimated costs, provision interest and partial payment surcharges do not have to be included in the annual percentage rate of charge. Banks can thus more easily influence the effective interest rate. If, for example, a processing fee is spent as an estimate, the effective interest rate decreases.
When is the effective interest rate not a suitable benchmark?
No suitable benchmark is the effective interest rate for home savings loans, as there are special rules for this. Even with loans that are finally paid off by a life insurance, the effective interest can not be used as a benchmark. The contributions for the insurance are not included in the effective interest rate.
Three offers for real estate financing over 120,000 euros with 10-year fixed interest and 2 percent repayment. Payment will be made in four installments every three months.
|conditions||Bank X||Bank Y||Bank Z|
|Specified effective interest rate||3.06%||3.16%||3.26%|
|Provisioning interest 0.25% pm||3 month||6th month||12th month|
|Partial payment surcharge per payment||100 euros||–||–|
|Total charges||2,410 euros||1,365 euros||0, – Euro|
|Actual effective interest rate||3.32% pa||3.31% pa||3.26% pa|
Source: Financial test
As can be seen from the example calculation, a low effective interest rate does not guarantee a favorable financing. Loan seekers are therefore advised to break down all incidental costs.
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