Basics
APR: the only figure that counts
Two offers, same amount, same term – and still hundreds of euros' difference. The reason is in the small print, and it is called the annual percentage rate (APR).
Nominal rate and APR
The nominal rate (borrowing rate) is the pure price of the money borrowed. It looks good in advertising because it says nothing about additional costs. The annual percentage rate (APR), on the other hand, includes all costs that the loan necessarily entails: arrangement fees, the method of interest calculation, the timing of payout and instalments. It is calculated uniformly across the EU under the Consumer Credit Directive and must be stated in every offer.
Only the APR makes two offers comparable. If one offer states a nominal rate of 3.5% and another an APR of 3.9%, you still know nothing – only the APR of the first offer allows a comparison.
The representative example
Banks may advertise a rate "from", but must state a representative example: the rate that at least two thirds of customers actually receive. This figure is more realistic than the headline rate, which only people with a very good credit rating obtain. When you read an offer, look first for the representative example – and then for your personal APR, which you receive after the quotation enquiry.
Credit-dependent interest rates
Most consumer loans carry credit-dependent interest: those considered lower-risk pay less. That is why a quotation enquiry via a comparison makes sense – you see your personal rate at several banks without the enquiry affecting your credit rating. How this assessment comes about is explained in the guide Creditworthiness.
What one percentage point costs
An example with €8,000 over 48 months:
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The instalment differs by a few euros, the total cost by more than a thousand. That is exactly why comparing pays off – and exactly why the instalment should not be the only criterion.
Payment protection insurance: not included in the APR
Payment protection insurance is voluntary, and its costs are therefore not included in the APR. If it is offered to you, convert it into an interest rate: for smaller loans, it often makes the loan several percentage points more expensive. For a loan of €8,000, it is as a rule not worthwhile.
Check in one minute
Take three figures from each offer: APR, term, total amount payable. If amount and term are the same, the lower APR wins. If they differ, the lower total amount payable wins, at an instalment you can afford – read more in the guide Term and instalment.