When borrowing, many customers stumble across numerous technical terms, such as the borrowing rate. In this article we explain what is behind it, how you can use it in a loan comparison and what is the difference to the effective interest rate.
What is the borrowing rate?
The borrowing rate, formerly known as the nominal interest rate, includes the interest that must be paid by the borrower to provide the loan amount. In addition to the interest on the loan amount, additional costs may arise when taking out a loan. Above all, these include:
- Processing fees.
- Final commissions or fees.
- Administrative fees.
However, these are not included in the borrowing rate. Many also know the borrowing rate from using their own overdraft facility. Here too, a borrowing rate has to be paid for the use of the disposable.
Different variants of the borrowing rate
There are two different types of borrowing rates that can be offered when borrowing:
- Bound interest rate.
- Variable borrowing rate.
What is the fixed borrowing rate?
A fixed debit interest is present when the interest to be paid is fixed from the outset over the entire term of the loan. This gives you planning security because the interest to be paid cannot change during the repayment. However, the disadvantage of the fixed interest rate is that you cannot benefit from falling interest rates on your loan during the entire term.
What is the variable borrowing rate?
With some loans, a floating borrowing rate is offered instead of a fixed borrowing rate. The interest to be paid can be changed by the bank during the term of the loan. If the interest rates on the capital market continue to fall, the interest on your loan can also be reduced. However, they can be raised just as well if market interest rates rise.
The reference rate of the Capital Lender is used to adjust the borrowing rate. Variable debit interest rates are most commonly found in the overdraft facility for a checking account. These are regularly adjusted by the banks if the Capital Lender’s reference interest rate changes.
How can the borrowing rate be influenced?
The borrowing rate offered by the bank to a borrower can vary. In addition to the current key interest rates of the Capital Lender, other factors also have an impact on the amount of the borrowing rate. The following applies:
The higher the risk for the bank when the loan is taken out, the higher interest will be charged.
For this reason, the following factors in particular influence the amount of the borrowing rate offered:
- The borrower’s credit rating
With the creditworthiness check, your creditworthiness is checked in advance of the loan. Customers with better credit ratings receive cheaper debit interest than those who can demonstrate a lower credit rating. The correspondingly greater risk of default is therefore more expensive for the bank to pay.
- The amount of the loan
The higher the total amount of the loan, the higher the debit interest is generally. The relationship between the borrower’s monthly income and the amount of the monthly repayment rate can also play a role in the amount of the borrowing rate.
What is the difference between borrowing rate and effective rate?
The borrowing rate only indicates the costs that the bank charges for the provision of the loan amount. No other costs are included here. The effective interest rate, on the other hand, combines not only the interest on the loan, but also all other costs that arise in connection with borrowing. Possible residual debt insurance is also included here.
In order to be able to carry out a credit comparison objectively, the effective interest rate is therefore more meaningful, since all costs are included.
Conclusion on the borrowing rate on a loan
The borrowing rate describes the costs due for the provision of the loan amount. However, it does not include any additional costs associated with the loan. In order to be able to compare loans from different providers, the effective interest rate is therefore appropriate. This includes all costs that arise from borrowing. With the help of our loan comparison, you can see at a glance which provider has the offer with the best borrowing rate and the cheapest effective interest rate. This way, you can easily choose the loan that is most suitable for you.