Effective interest rate – We explain what an effective interest rate is
Effective interest rate – The word effective interest rate is often encountered when searching for loans. It is a percentage that shows how much a loan costs in total, including both ordinary interest and other fees.
The idea is that it is possible to compare different loans with one another in a smooth way and that you can see all hidden fees directly and be able to calculate what a loan really costs.
Effective interest rates
Effective interest rates are calculated by taking the total cost of a loan and setting it as an annual interest rate on the loan amount. The effective interest rate is thus not the same as the ordinary interest rate, since other costs such as setup fees, deposit fees and all other costs that may arise in connection with a loan are also included here.
Thus, if you have two lenders that you stand and choose between when it comes to loans that extend over a year, you should be able to feel confident that the lender that offers the lowest effective interest rate is also the cheapest overall.
For loans that extend over longer periods of time (one year and more), effective interest rates can be a very good way to compare different lenders and their loan costs. Effective interest rates are less favorable when it comes to loans with shorter maturities (during one year) such as SMS loans, when it becomes somewhat misleading.
Since the loan is repaid in a much shorter period of time than one year, you get an effective interest rate that can easily exceed 1,000%. This is because at shorter maturities than one year, it is always considered that you had to take the same loan over and over until you have borrowed the money for a year. It is no wonder then that the effective interest rate becomes extra high.
Our basic tip when comparing fast loans and SMS loans is therefore to check what the loan costs as it is easier to get a good idea in this way.
Then it should be said that two identical SMS loans, in terms of size and maturity etc., can be compared against each other with effective interest rates because they then play on the same terms. The loan that then has the lowest effective interest rate becomes the cheapest.
If you want to read more visit then our page where we have written more about effective interest rates.