The required amount of money

The required amount of money

At last! The end of the search for a lender is within reach, the required amount of money has been calculated with the most accurate security buffer and you “hold” the money in your hands – and suddenly there is talk of an interest rate, a repayment plan and what actually mean Nominal, real or effective interest rate? And what are interest rates anyway?

The word “interest” comes originally from Latin, from the word census for estimation, and represents the amount – the economists speak here of the remuneration – that a debtor gives to a creditor (the one who lends you the money – a bank or a private one) Money lender) in return for temporarily released capital.

If you have agreed with your creditor that he will lend (borrow) money for a defined period of time, it is now a matter of agreeing an interest rate . The interest rate represents the price for the borrowed capital and is defined in the form of a percentage. Usually, an interest rate always refers to a year, although what is “a year” can differ depending on the country in which you live. The German year of interest always consists of 360 days (i.e. always 30 days per month – even if this does not correspond to reality), while in the Anglo-American language area one speaks of the common year, which comprises 365 days.

In the case of financing, it is customary to give the customer at least 2-3 different interest rates:

  • The nominal interest rate: This represents the pure interest rate, which is calculated using the regular interest formula.
  • The effective interest rate: Banks in particular are not only rewarded for the provision of a loan by the pure interest to be paid, but they usually also calculate fees (titled as ancillary costs in banking jargon) that should not be neglected. These are added to the interest so that you get an actual interest rate, the effective interest rate, which consists of nominal interest and costs.
  • The real interest rate: The interest rate that takes into account the effects of inflation and “adjusts” the nominal interest rate by this amount. In the actual financing area, this interest rate is rarely encountered – especially since the scientists cannot agree on the definition of what belongs to inflation …

Use the effective interest rate

Use the effective interest rate

As a customer, you should always use the effective interest rate as a measure when making your interest payment when it comes to deciding whether you should afford this loan or not. But there is another important aspect that is often overlooked, but which can cost you dearly: the question of fixed interest rates and whether your interest rate is variable or fixed .

If we can give you good advice: Always prefer fixed interest rates with a clearly defined fixed interest rate. A fixed interest rate is an interest rate that always remains the same for the entire term of the loan, the term of the interest (also known as fixed interest rates). Perhaps you already had the “sad experience” of a variable interest rate in relation to your so-called overdraft facility…. If the account is in the red and you are also a customer of a bank that does not put your customers’ interests first, but above all your own, it can happen that the bank does not immediately block your account. Instead of agreeing a reasonable fixed interest rate with you for the amount that you overdraw, the bank “tolerates” your overdraft and links the estimated interest rate to a variable reference rate. The result: If the economy or the market changes, your variable reference interest rate increases.

Therefore, the following applies: When deciding on a loan, planning security should always be in the foreground. A fixed rate with a clearly defined term is the best way to do this.

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