Regardless of variable or fixed interest rates, a distinction is still made between the nominal interest rate and the effective interest rate. A bank may just mention one of the two interest rates – but both are equally important. As a borrower or saver, you should know the main differences.
Nominal interest rate
Banks charge a fee for the loan, which the borrower has to pay. This fee is the nominal interest rate. Even if the interest is paid monthly, the nominal interest generally refers to a calendar year. The billing period is therefore always the year, despite the monthly payment by the borrower. Usually, the borrower also receives a so-called balance notification at the end of the year, which shows how much interest was paid in the past year. It is different from investments: Here the bank does not credit the interest earned until the end of the year.
Effective interest rate
The effective annual interest rate includes all costs associated with the loan. The effective interest rate results from the nominal interest rate taking into account all ancillary credit costs up to the expiry of the contract. Ancillary credit costs include processing fees, land registration fees for the lien, appraisal costs, account maintenance fees and even the premiums for mandatory risk life insurance, as shown in our chart below.
The effective annual interest rate is therefore very meaningful and helps to compare loan offers from different banks. However, such a comparison only makes sense if the underlying parameters of the offers (term, reference rate, fixed interest rate, etc.) match. Interest rate calculators on the Internet should also always specify both interest rates.
What is the current interest rate on loans?
Interest rates are lower than ever in Austria as well as internationally. The low-interest rates are suffering for one and joy for the other. In other words, while savers complain about low-interest rates, borrowers are particularly happy with long-term Adam bed financing about very low loan rates. But why is that and what does that mean for borrowers?
Loan interest in Austria
Loan interest rates are currently at a very low level in Austria. A key reason for this is the current monetary policy of the Best Bank. The development of the short-term rate of interest money market rates was even more extreme. These are currently even negative.
These developments mean that above all Adam credits – both variable and fixed interest – are cheap to obtain. Last but not least, this depends not least on the personal creditworthiness of the borrower, but loans in the past few decades have probably never been as cheap as in the current phase. Here you can find statistics from the Capital lender bank on loan interest rates in Austria.
International loan interest
If you compare loan interest in Austria with abroad, you can see that we live in a very cheap credit world. This is also due to the fact that credit institutions in Austria face stiff competition and cannot adjust prices at will, as they could otherwise lose market share. Ultimately, digitization also plays its part: price-sensitive customers can change banks very easily and quickly.
Who offers the cheapest loan interest in Austria?
There are almost 600 credit institutions in Austria, so it is difficult to say who is currently offering the cheapest loan interest. It is hardly possible to answer this question because it depends on a number of factors. Personal creditworthiness and the company’s own funds are particularly important. The credit model is also relevant because while some banks are very cheap with variable interest rates, there are banks that offer very low-interest rates with fixed interest rates. Get different loan offers and compare interest rates to get the best deal for you.
Forecast: This could continue with loan interest in Austria
It cannot be said with any certainty what the future interest rate on loans in Austria will look like. National banks have kept interest rates very low in recent years in order to boost economic growth and thus inflation. Economic growth has been steadily improving in recent years, so the recipe seems to be working.
In the United States, interest rates have already risen in several steps, so something similar can also be expected for Europe and Austria. If you would like to know more about this, read our guide on future interest rate developments.
Calculate compound interest
You can calculate your compound interest with the help of a mathematical calculator or on the Internet with various interest calculators to calculate. However, you should note that compound interest is only relevant to you if you are late in paying the loan installments. In the following section, we explain how interest is calculated and how you can calculate your own interest.
How do I calculate interest on a loan?
To calculate the interest on a loan, you need the total loan amount and the nominal interest of the loan. Both information can be found in the loan agreement. So how does it work? Put simply: If you multiply the total loan amount by the nominal interest, you get the total amount of the annual interest to be paid.
The total loan amount is simply the amount that includes all of the ancillary loan costs. After the loan is mostly repaid, the loan amount is reduced annually by the repayment portion. The interest is always calculated from the currently outstanding loan amount.
Compound interest: calculation and impact
If a loan is not repaid over a certain period of time, interest accrues, which must also be paid on an ongoing basis. However, if this interest is not paid immediately, the total loan amount is increased by the unpaid interest. Interest is, therefore, due again on the unpaid interest. One speaks of compound interest or compounds interest effect, which leads to increased interest expenses.
Calculate interest with special repayment
If there is capital available for the partial repayment of a loan during the term of the loan, this is referred to as a special repayment. Due to the special repayment, the loan is reduced and the interest expense is also reduced. It is difficult to calculate in advance.
Interest on a home loan: what is to be expected?
If you take out a house loan, interest is due. This can then be variable or fixed interest over a certain term. No matter which loan model you choose, the amount of the loan interest depends primarily on your personal creditworthiness and the available capital. The fact is, the more equity or collateral you can offer the bank, the sooner you will be able to enjoy the best conditions.