It depends on the interest rate. Borrowers first look at the interest information on a loan offer. Rightly so, because the interest rate is a decisive indicator of how cheap a loan is for the consumer. But which interest rates are really meaningful?
There is information about whether the interest rate depends on the creditworthiness or whether the installment loan is granted at a standard interest rate.
Consumers very often find this information in a note marked with an asterisk somewhere below in the credit offer. The borrowing rate is also differentiated from the effective interest rate, and finally, there are representative examples. Here it is explained which interest rates are important and which installment loans are actually consumer-friendly:
Loans with interest rates dependent on creditworthiness or with uniform interest rates independent of creditworthiness.
What does credit-related interest rate mean?
The bank’s interest offers are not only dependent on the amount of the loan and the term. They also depend largely on the individual creditworthiness of the customer.
Each credit check is carried out in two stages:
Firstly, by obtaining Credit Checker information or information from other credit agencies such as Good Credit.
This information contains two different pieces of information. First of all, the bank learns whether its customer has so far properly fulfilled all liabilities or whether there are negative Credit Checker entries. If there are no negative Credit Checker entries, a Credit Checker provides a score calculated according to certain standards.
The score measures the likelihood that the borrower will meet his loan obligations.
For this purpose, he is assigned to groups of people according to certain criteria. It is not the concrete reliability of the customer that is measured, but the abstract reliability of the group of people in which the customer is classified.
On the other hand, the bank measures the creditworthiness of its customers through its own surveys. This includes information about the civil status, the place of residence and above all about the income and financial situation.
The results of both exams are summarized in a kind of overall grade. How the bank evaluates individual components and how strictly the creditworthiness criteria are handled is practically treated as banking secrecy.
The criteria vary from bank to bank.
The bank uses the credit rating to assess the credit default risk.
The higher this risk, the more the bank’s earnings are questioned.
In order to reduce the risk and thus secure the profit or at least exclude losses, higher interest rates are used if the creditworthiness is poor.
In other words, customers with a good credit rating can expect low-interest rates.
With increasing creditworthiness cuts, interest rates continue to rise until the credit rating is no longer sufficient in the bank’s opinion for lending.
If the bank offers uniform interest rates independent of creditworthiness, all customers pay the same interest for a loan with the same term and the same loan amount.
However, there is a limit credit rating, below which no loans are granted at all.
A simplified example should clarify this: The bank assesses the creditworthiness based solely on the information about the bank score.
According to their guidelines, loans should only be granted up to a score of level D, which means a default risk of 3.13%.
All customers receive the same interest rate, even if they have an A rating. Customers with a rating level lower than D do not receive a loan.
Loans with standard interest rates are very often only given to customers with above-average or good credit ratings.
Other consumers do not enjoy the interest rates that at first glance seem cheap.
The stricter the marginal credit rating, the better the interest rates and the lower the chance for consumers to get a cheap loan with a single interest rate.
Some banks scale the uniform interest rates either by terms or by loan amounts, sometimes even according to both criteria.
The unit interest rates are then different and you can usually find them in an interesting table.
Credit-related or uniform interest rates: Which interest rate is cheaper?
Standard interest rates that are independent of creditworthiness are often presented as particularly consumer-friendly. Consumer advice centers are sometimes of the same opinion.
In fact, unit interest rates are somewhat transparent. When making an application, customers do not know whether they are getting a loan at all.
But if the loan is granted, they know in advance what the interest rate will be.
If loans with interest rates dependent on creditworthiness are offered, the customer initially remains unclear about the actual conditions.
Only when there is a concrete loan offer does he know how high the interest is. For this reason, interest rates dependent on creditworthiness appear less transparent.
It is also difficult to compare such loans in advance.
Additional opacity arises from playing with interest rates. Loan providers advertise with a minimum interest rate and a maximum interest rate.
So-called, but worthless, credit calculators are often offered, with the help of which customers can estimate the monthly installments. These loan calculators usually always use the minimum interest rate.
The minimum interest rates are unrealistic. A maximum of 5% of customers with the very best creditworthiness can hope to receive a loan at the minimum interest rate. Anyone who hopes for such input interest rates will be regularly disappointed.
Flat rates are problematic in another way. The credit default risk is a cost factor that must be taken into account when calculating the right interest rate.
If banks offer loans at standard interest rates, they do a kind of mixed calculation. The result is that customers with very good credit ratings have to pay higher interest rates than would be appropriate given their credit rating.
These customer groups are therefore disadvantaged.
As a rule, only customers with poor creditworthiness benefit, but whose creditworthiness is still sufficient for lending.
This is often the customer group with the worst possible creditworthiness.
Some banks also use the standard interest rate as a lure for loans with higher, then credit-dependent, interest.
Although an applicant does not have the required creditworthiness for the unit interest rate, he still receives a loan offer from the bank, but with higher interest rates.
If you weigh the advantages and disadvantages of both types of interest against each other, they are actually in balance.
Real loan comparison is only possible on the basis of specific loan offers. This is the only way that borrowers with loans with a single interest rate can determine whether they have a credit opportunity at all.
In the case of loans with interest rates dependent on creditworthiness, specific loan inquiries are also required to determine the actual effective interest rate.