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How does it work with effective interest rates? – Any Loans

A good concept to keep track of when it comes to loans is effective interest rates. For some types of loans, it is basically only this figure that you need to compare.

In simple terms, the effective interest rate is the sum of all the costs of the loan converted to an annual interest rate. Thus, there is little difference between ordinary interest rates and effective interest rates, since the ordinary interest rate is only part of the effective interest rate.

The effective interest rate is thus included in the ordinary interest rate

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But also all other possible costs incurred for the loan. Examples of such can be setup fees and newspaper fees.

If your loan has no costs whatsoever other than the interest rate, the effective interest rate will be the same figure, but if there are other costs it will be higher. If you have two loans that are equivalent in terms of other terms, then the loan with the lowest effective interest rate is the cheapest.

The idea of ​​presenting loan costs in this way is that it should be impossible to hide some costs for the customers. For example, if you have a loan with an interest rate that is a little higher than another but that does not have a set-up fee, this loan can be cheaper overall and this is then reflected in the effective interest rate.

Calculated on an annual basis

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It is important to remember this as it can have a big impact for certain types of loans and especially for SMS loans. Since these loans do not normally extend over an entire year, the effective interest rate becomes very high. In principle, the sum that comes up is if you borrow money and then take the same loan again for a whole year. So if the repayment period is 30 days, then it really is like you take this loan 12 times in a row which becomes very very expensive. Therefore, it is possible to see SMS loans with effective interest rates above 1,000%.

The tip for SMS loans is to basically compare what they cost straight in USD. This is not at all as good for a mortgage loan as it is difficult to manage the figures. But an SMS loan that costs a few hundred kronor is much easier to compare in this way. Then it should be said that it is possible to use effective interest rates even for SMS loans to find the cheapest loan. The important thing is that you then make sure that the conditions are exactly the same. Because even if you compare say 5,000 loans with each other, the effective interest rate will normally be extremely different if one loan extends over 30 days and the other 90 days. However, if both loans had a maturity of 30 days, it would have been quiet to compare them.

For longer loans such as private loans / bank loans, car loans and mortgages, it is brilliant to use the effective interest rate. All these loans last for at least a year and then it becomes a very good yardstick.

Advertising

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Good to think about is almost always when the loan companies advertise their loans, it is the usual interest rate that is marketed or the nominal interest rate it is really called. Which is not directly surprising as this is normally a lower figure. For those of you thinking about borrowing, it is therefore important not only to read what they say in advertising and automatically believe that it is the real cost.

Even if they do not like to print what the effective interest rate is, they must do so. However, it is not certain that it is written in capital letters on the site, but it may well be in fine print somewhere.