What is Effective Interest Rate?
Quick Summary
The effective interest rate (annual percentage rate, APR) indicates the actual total cost of a loan per year. In addition to the nominal interest rate, it includes all ancillary costs such as processing fees, enabling a fair comparison of different loan offers.
Definition in Detail
The effective interest rate – also called annual percentage rate (APR) – is a standardized metric that expresses the total cost of a loan as a percentage per year. In Germany, it is regulated by the Price Indication Regulation (PAngV) and must be calculated and disclosed uniformly by all lenders.
Unlike the nominal interest rate, which only indicates the pure interest rate for capital provision, the effective interest rate considers all price-determining factors:
- The nominal interest rate
- Repayment processing (timing of interest payments)
- Processing fees and closing costs
- Account management fees for the loan account
- Broker commissions
- Disagio (deduction at disbursement)
How Does the Effective Interest Rate Work?
The calculation of the effective interest rate follows a complex mathematical formula specified in the Price Indication Regulation. As a consumer, you do not need to apply this formula yourself – the lender is obligated to correctly disclose the effective interest rate.
Simplified Explanation:
The effective interest rate answers the question: "What percentage of my loan amount do I pay annually in total costs?"
Note: The actual calculation according to PAngV is more complex and considers cash flows over the entire term.
Calculation Example
Assume you take out an installment loan of €10,000:
| Cost Factor | Offer A | Offer B |
|---|---|---|
| Loan Amount | €10,000 | €10,000 |
| Term | 48 months | 48 months |
| Nominal Interest (fixed) | 5.50% | 6.20% |
| Processing Fee | €300 | €0 |
| Effective Interest Rate | 6.95% | 6.20% |
Result: Although Offer A has a lower nominal rate, Offer B is overall cheaper due to the lack of processing fees. The effective interest rate clearly shows this.
Advantages and Limitations
Advantages
- • Enables fair loan comparison
- • Legally standardized calculation
- • Includes all essential costs
- • Consumer protection through transparency
- • Mandatory disclosure in ads and contracts
Limitations
- • Does not include all optional costs
- • Residual debt insurance not included
- • Only estimate for variable rates
- • Commitment fees often not included
- • Early repayment fees not considered
Frequently Asked Questions
What is the difference between effective interest rate and nominal interest rate?
The nominal interest rate is the pure interest rate for borrowing. The effective interest rate additionally includes all ancillary costs such as processing fees, account management fees, and interest calculation. Therefore, the effective interest rate is always higher than the nominal rate and indicates the actual loan costs.
How is the effective interest rate calculated?
The effective interest rate is calculated according to the German Price Indication Regulation (PAngV). The formula considers the nominal interest rate, all ancillary costs, repayment processing, and disbursement rate. For consumers, it is easier to compare the annual percentage rate stated by the lender.
Why is the effective interest rate important for loan comparison?
The effective interest rate enables a fair comparison of different loan offers because it uniformly considers all costs. A loan with a low nominal rate can be more expensive due to high ancillary costs than a loan with a higher nominal rate but lower fees.
Is the effective interest rate legally required?
Yes, according to the German Price Indication Regulation (PAngV), lenders must state the annual percentage rate in all advertisements and contract documents. This serves consumer protection and enables transparent comparisons.
What costs are not included in the effective interest rate?
Not included in the effective interest rate are optional costs such as residual debt insurance, account management fees for a separate checking account, commitment fees for mortgage financing, and early repayment fees. These costs should be considered in the overall calculation.
Legal Notice
The obligation to disclose the effective annual interest rate is regulated in the German Price Indication Regulation (PAngV). Lenders must calculate and disclose the effective interest rate according to uniform criteria in all advertising materials and pre-contractual information. Status: February 2026.