The loan interest rate is indispensable for loan and loan agreements and an integral part when it comes to the necessary capital for smaller and larger purchases. For example, in real estate financing or mortgage lending, very few people can afford this completely out of their own savings. Before taking out a loan, one of the most important contract points is the loan interest rate, often called the borrowing rate.

These interest rates determine the full amount of the loan costs and depend on many different factors such as the creditworthiness of the borrower, the offers of the lender, as well as the respective constitution of the entire financial system. In the following article, we would like to inform you about the debit interest and, in particular, highlight the different forms of loans in which the loan interest is used.

Most common types of loan interest and loans

There is a very wide range of loans that differ not only in their amount and interest rate. Very important criteria for distinguishing the different forms of loans are, for example, how the loan is repaid or repaid. Of course, there are also different interest rates that affect the complete eradication. We would like to briefly introduce you to the most common types of loans below.

Loan interest on a fixed loan

A fixed loan, often referred to as a term loan, is a loan whose borrowed amount is not repaid until the end of the repayment period, unlike the annual interest due on loans. Reasons for this repayment-free loan type can be, for example, existing life insurance policies or home loan savings contracts whose dissolution is not yet worthwhile for financing.

The fixed loan acts in this case as a kind of interim financing for an acquisition, until the payment of the respective contracts or insurance. This saves monthly installments if they are not necessarily financially supported by insurance rates. The annual loan interest rates remain constant for the term loan. In our example table you can see a fixed loan repayment plan. The loan amount amounts to € 80000.00 at a loan interest rate of 5.00% per annum with a term of 5 years.

Loan interest on repayment loans and installment loan

In common parlance, the term repayment loan is used synonymously with the installment loan, thus also includes loan interest. However, the annuity loan (see below) is also part of the repayment loans. In contrast to the term loan, a debt installment over the specified loan term, the debt amount is paid by installments. These rates can be paid monthly, quarterly or annually.

As a result, the residual debt and thus the amount of the loan interest payable, as well as the total loan installment, are reduced over the course of the credit period. Based on a sample calculation, we would like to explain to you the procedure of a installment loan. As above, the loan amount is € 80000.00 at a loan interest rate of 5.00% per annum for a term of 5 years. The repayment installment pa is € 16,000.00.


An annuity loan is also a repayment loan with loan interest. This means that in this form of loan also the remaining debt of a loan amount over the term is regularly repaid. However, the regular rate remains the same over the contract period. The decreasing loan interest amount thus increases the repayment amount. Below we have compiled a sample calculation for you again. The loan amount is € 80000.00 and runs at a loan interest rate of 5.00% per annum. The annual rate amounts to 18477.98 € with a term of 5 years.

Determination of the loan interest rate

In the examples described above, we assumed an exemplary fixed loan interest of 5.00% pa However, that is not necessarily the norm. Loan interest may be charged at the time the loan agreement is concluded, either as a fixed rate or as variable interest. Both types of interest can have a positive and negative effect on the borrower or the lender, since the variable interest rates can change with the current market situation.

This means that, for example, a fixed interest rate as a loan interest makes sense for the customer if a bad financial situation is foreseeable in the coming years. Conversely, a variable loan interest rate is advantageous if the market situation can improve. Laypersons should therefore necessarily seek out an independent financial adviser before concluding a loan. Apart from the nature of the loan interest, there are other important variables that determine the amount of the loan interest. One of the most important is the creditworthiness of the borrower.

A well-paid job, collateral such as property or real estate or stable living conditions of the borrower guarantee the bank that the installments can be fully and regularly repaid. Banks often require borrowers who are still in education, whose occupation is seasonal or risky, or who are already in debt, to pay a higher loan interest rate or completely reject the loan application.

You should pay attention to the loan interest rate – effective interest rate and borrowing rate

In addition to the various fluctuations in the credit market and in the financial sector, as well as different borrowing rates, further fees by the lender can influence the effective interest rate. The effective interest rate is calculated from the borrowing rate and additional expenses that the borrower has to pay. These other costs include, for example, account maintenance fees or provisioning fees. In addition, there are fees that are charged by the banks when, for example, at the beginning of the loan term, a higher repayment is requested by the customer, than at the end. These additional costs can increase the effective interest enormously even with an apparently favorable borrowing rate. A recommendation is therefore always to consult an independent credit counselor before concluding the contract.

Loan interest – all facts at a glance

In the jungle of financial terms, they are at least really cope. Frequent changes in the amount and various requirements of the banks, make it difficult to pronounce a general recommendation for the loan choice. Of course, often only going to the independent loan consultant helps. For an initial overview of loan interest rates and their characteristics and differences, we have put together everything at a glance.

  • Loan interest is the interest that the lender regularly pays on the remaining debt.
  • With different types of loans, the loan interest rates develop differently.
  • As a favorable loan from an interest perspective, the installment loan applies – but you have to pay your installments throughout the term.
  • Loan rates are set differently or are variableVarious sizes and developments in the financial industry can change interest rates in the latter loans, which has advantages as well as disadvantages.
  • An important factor for the interest rate is the creditworthiness of the borrower.
  • Loan interest is not equal to effective interest! Banks often charge fees and other interest on credit transactions; the effective interest rate includes the total cost of the loan.

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