Loan interest is payable on every loan. How high the interest rates are depends on the current market level as well as individual factors such as the creditworthiness of the borrower, the loan amount and the purpose of use. However, consumers can always save interest on loans by comparing offers from different banks. It is important to use the annual percentage rate and not the pure borrowing rate for a comparison.
The essentials in brief:
- Current loan interest rates (early 2019) are still at an all-time low and have been falling steadily since 2008/2009.
- Loan interest depends primarily on the creditworthiness and the collateral of the applicant as well as the loan amount and the purpose of use.
- Only the APR gives the total cost of a loan.
- Interest on a loan can be deducted from tax under certain conditions.
What is loan interest?
If a borrower pays interest to his lender, this is generally referred to as the loan interest. Usually, this interest is also called debit interest and is always given in percent. They are usually calculated on the basis of the nominal loan amount at the end of a calendar year.
By the way: Until 2010, the pure debit interest was also referred to as nominal interest. With the amendment of the consumer credit directive in June 2010, the term debit interest has prevailed.
Loan interest rate development until 2019
Since the financial market crisis in 2008/2009, loan interest rates (mortgage lending) have steadily moved down from 5.00 to 6.00 percent to just under 1.00 percent recently. This development is also related to the continual cut in key interest rates by the European Central Bank. The key interest rates in the euro area have been at 0.00 percent since March 2016. Even after the last Cream Bank meetings, market experts are not expected to see an interest rate turnaround this year.
How can loan interest be calculated correctly?
When talking about loan interest, the debit interest is usually meant. However, since there are other costs in addition to processing fees when granting loans, the borrowing rate is not meaningful enough for the consumer. Because the borrowing rate only includes the fee paid for the transfer of capital.
Other credit costs such as administration fees are not included. The legislator therefore prescribes the indication of the effective interest when granting loans. If you want to calculate how high your debit and effective interest rates are, you can use these formulas to calculate your loan interest:
The debit interest is calculated as follows:
Loan amount x borrowing rate / 100 x term = borrowing rate Example: 10,000 USD x 2.50 / 100 x 6 = 1,500 USD
How the annual percentage rate is calculated (simply) :
Debit interest + fees + other costs = interest costs Example: 1,500 + 150 + 75 = 1,725 USD
[Interest cost x 100] / [Loan amount x term in years] = Effective annual interest rate (in%) Example: [1,725 x 100] / [10,000 x 6] = 2.875% pa
This is how borrowers secure cheap loan interest
If you want to have cheap loan interest rates, you should know what affects interest rates in the lending business. In principle, banks are only willing to charge low interest rates if their risk of default on the customer’s side is very low. In a way, the loan interest rate is a barometer for the risk in the lending business. However, loan interest is influenced by other factors. So the height also depends on
the creditworthiness according to Credit Bureau information: the higher the Credit Bureau score, the better the creditworthiness and the lower the loan interest.
the additional [collateral ] such as savings, shares or a surety: the more collateral, the better the loan interest.
The intended use of the loan: Unrestricted installment loans are generally more expensive than loans that have a fixed intended use. Such dedicated loans are, for example, real estate and car loans. Since the bank can have the car or real estate seized in the event of a default, it offers borrowers more favorable terms. In – the freely disposable income : the higher it is, the better for the creditworthiness and the interest on the loan.
The term of the loan: Longer terms are associated with a higher risk of non-payment for the lender. For this reason, the bank charges an interest surcharge. However, the first two criteria are creditworthiness and collateral for every bank. Because especially a bad Credit Bureau score and insufficient collateral are too great a risk for any lender. Then the bank will not grant a loan at all.
Saving loan interest through credit comparison
To find a loan at the lowest possible interest rates, special credit comparison calculators are particularly suitable. The right product can be quickly found from a large number of loan offers, conveniently from home and at any time outside the opening times of bank branches. The search is narrowed down with just a few details, such as the loan amount, term or purpose. As a result, online comparison calculators show the offers in question sorted by the amount of interest. With Good Finance’s free interest rate comparison, only a few steps are required to find the best loan offer:
- Enter the desired loan amount
- Select term
- click Usage
- Check offers from different providers
- choose the personally best offer
- decide and submit the loan application to the provider !
Tip: The free telephone service from Good Finance can also be used for further questions regarding the search for the best loan interest.
Deduct loan interest from tax – only possible as advertising costs
In some cases, anyone who has to pay tax on wages or income can expect loan interest to be tax-deductible. Depending on the use of the underlying loan, they are recognized for tax purposes as advertising costs. Then the loan interest can be claimed in your own tax return and thus reduce the taxes payable. Here are some cases recognized by the tax authorities where loan interest rates reduce tax:
– Advertising costs for the purchase of real estate: If the loan is used to finance the purchase of a rented property, the loan interest is recognized as a tax-deductible advertising cost. This also applies if employees purchase a second home through a loan. However, the condition here is that the purchase of an apartment must be professional, for example because the place of work is too far away from the main place of residence. – Investments for work: If freelancers or the self-employed finance the purchase of work equipment such as a computer, laptop or company car via a loan, these loan interest are also tax-deductible.
Debt loans and benefit from top interest rates
In the current low interest rate phase, it can always be worthwhile to replace older, longer-running loans with cheaper ones with lower interest rates. Even in 2019, the chances are still good to benefit from low interest rates when rescheduling. Therefore, interest and conditions should be compared with alternative offers as early as possible. If you want to save money here, you can also check the conditions professionally and comprehensively with the free interest comparison from Good Finance.