For at least two years now, not only are investors annoyed about low capital market rates, but there is also the other side of the coin. For example, loan seekers and borrowers are looking forward to very low loan interest rates, which have fallen significantly in recent years.
Interest rates are of great interest to both investors and borrowers because they are either the return on a financial investment or the cost of funding. For a variety of reasons, it is important for loan seekers and borrowers to keep up to date with loan interest rates, as even small differences in interest rates can result in significantly higher or lower costs.
Interest as a relevant influencing factor
More and more customers nowadays have the opportunity to make a detailed comparison of offers before taking on a loan. Again and again, research shows that the level of interest on loans is the key factor driving the decision for or against a loan offer.
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In particular, the effective interest rate is used as a benchmark, as this interest rate includes numerous costs and the repayment of a loan. If you take a closer look at the overall market, lending rates are currently at a low level, at least since the introduction of the euro. Mortgage interest rates, in other words, the interest that borrowers pay for real estate loans, have in some cases already slipped below one percent. But even with other forms of credit, in particular installment loans, the significantly lower level of interest rates is evident.
What is loan interest actually?
Experts use terms such as loan interest rates or effective lending rates for granted, although there are, of course, quite a few consumers on the other side who do not even know what loan interest rates actually are in detail. Basically, one can say that the loan cost is the main cost factor for every loan you take out. Whenever you lend money to a bank or even a private person through a credit marketplace, usually loan interest is due. The interest rates are usually given as an interest rate, for example, at the rate of four percent. For example, if you borrow an amount of $ 10,000, with a four percent loan interest rate, you will need to pay interest of $ 400 within a year.
With installment loans, interest rates are usually always calculated on the basis of the initial loan amount. If the credit in the example has a term of three years, you would pay 400 euros per year and thus a total of 1,200 euros in interest. Expressed in economic terms, the lending rates are a charge for the lender of the capital, which is payable by the recipient, ie when the borrower finances. The lending rates and interest rates can be divided into two groups, namely the one in debit interest and the other in the effective interest rate. The debit interest is the nominal interest that must be paid on the basis of the loan amount. This includes neither the settlement of the repayment nor any other costs that may be charged. It is different in the effective interest rate, because this interest rate includes both the amortization and some other costs that may be incurred.
Classification in credit-dependent and credit-independent interest rates
A further differentiation or classification of loan interest rates has become particularly important in recent years, namely the division into credit-based and credit-independent interest rates. In the case of credit-dependent loan interest, the amount of the interest rate estimated by the bank depends on the borrower’s creditworthiness. As a result, anyone who has a good credit rating usually pays a lower interest rate than a customer with poor or mediocre credit ratings. The opposite is the credit-independent interest rates. As the name suggests, the level of the interest rate in this case does not depend on the creditworthiness of the customer. Instead, other factors play a role, in particular the loan amount chosen and the term of the loan.
In which area of financing are interest rates relevant?
In principle, loan interest rates are of greater importance in practice in virtually every form of financing. Exceptions are only so-called zero-percent financing, which are rarely offered by banks, but – if any – primarily by car dealers or major mail-order companies. Apart from that, retail loan interest rates play a role, in particular in the following three types of superordinate loans:
- credit Facility
- installment loan
- Real estate loans
In the following, we would like to take a closer look at the respective loan type and provide you with information on how high the loan interest rates for the respective financing are currently on average and what you should pay attention to.
Disposition credit: debit interest on negative account balance
Many millions of Germans use a discretionary credit, which is a committed credit line in the checking account. Whenever the checking account is in the debit (minus), the dispozins will be charged. The advantage of the disposition credit is the fast availability and the fact that there is no fixed repayment date. In addition, there is a day-specific settlement of the interest payable, which is also – especially in comparison to the installment loan – as an advantage.
In addition to the advantages of the disposition credit, however, has a very serious disadvantage, namely that it is a very expensive form of financing. Despite the low level of interest rates in Germany, the discretionary interest rates are still only just under ten percent, if one looks at average lending rates in this area. Therefore, it often makes sense to carry out a rescheduling, if only because of the possible interest savings, mainly in a installment loan or a framework loan. The best offers for the credit line are currently in the range of a dispo rate of 6.9 percent.
Installment loans: more and more offers with low interest rates
If you look at the average interest rates that you have to pay on the installment loan, one thing stands out: In recent years, there has also been a trend in this area, which has clearly led to ever-lower interest rates. While the average interest rate on installment loans was more than eight percent five years ago, borrowers now pay an average of only 5.5 percent interest on new installment loans. In the meantime, there are not even a few offers in the area of installment loans where the interest rate has already fallen below the 3.5 percent mark.
Real estate loans: interest rates at extremely low levels
In particular, customers who either want to buy or build a house soon and therefore need real estate financing should always keep up to date with the current loan interest rates. Mortgage rates, also known as construction rates or building loan interest rates, have fallen significantly in recent years. The best deals are currently in the range of less than 0.9 percent. However, such extremely low interest rates are usually available only if the borrower has an equity interest of 20% or more and, moreover, has an excellent credit rating. Nevertheless, it is now possible to obtain real estate loans at a very low interest rate.
Despite the large supply and the sometimes extremely low interest rates, loan seekers should not make the mistake of looking at the interest rate, especially in mortgage lending. Instead, it is important to choose a suitable eradication. Initial redemptions of one percent, as they were a few years ago with real estate loans the standard, are now definitely not recommended. In this case, the repayment period would often be more than 35 years, which entails a significant interest rate risk. Therefore, experts recommend, if the financial situation permits, to agree on an initial repayment of at least three percent on mortgage lending.
What influences the current loan interest rates?
When it comes to which factors fundamentally affect loan interest rates, the experts distinguish between so-called internal and external factors. At this point we would like to start with the external factors, which include in particular the following:
- ECB key interest rate
- Relationship between supply and demand in the market
- Economic development
First and foremost, of course, it is the ECB’s key interest rate that is the main factor influencing almost all banks when setting their loan interest rates. While there is no link between policy rates and lending rates, it has always been observed in history that with interest rates rising, interest rates on loans also rise, while banks lower their lending rates in turn if the ECB has previously cut interest rates. Therefore, it is also easy to explain that lending rates are currently at a very low level as the ECB policy rate is at zero percent. But the previously listed factors also affect the lending rate set by the banks.
In addition to the external influencing factors mentioned above, there are also the so-called internal influencing factors, which also have an effect on the level of the interest rate that the bank ultimately estimates. These internal factors include in particular:
- Order on the market (competitor)
- loan amount
- Type of loan
- running time
- Creditworthiness of the customer
These factors are currently having the strongest impact on the interest rate the bank expects to finance. The differences can be particularly great if one compares customers with a bad and good credit rating. For example, if you look at real estate loans, it can happen under otherwise identical conditions that a customer with a mediocre credit rating and low equity for a loan amount of 150,000 euros has to pay a 3.5 percent interest rate, while another borrower with a very good credit the same loan amount at the same credit institution already receives at a rate of 1.5 percent.
The current development of loan interest is therefore always characterized by differences, so you can not name uniform interest rates, with which customers can calculate firm. For this reason, it is very important to keep up to date on the current interest rates and above all to perform a comparison of offers.