Nominal Interest
Table of Contents
1. Definition "nominal interest rate"
The nominal annual interest rate (also referred to as nominal interest or debit interest) calculates the fee that a lender charges for granting a loan. In principle, the nominal interest rate refers to a calendar year. Therefore, it is always indicated by the addition p.a. (Latin: pro anno or per annum).
The nominal interest rate, together with the repayment amount fixed when the loan is taken out, results in the loan instalment, i.e. the amount to be paid monthly to pay off a loan.
2. Nominal interest rate vs. effective interest rate
The nominal interest rate does not take into account ancillary credit costs. These include all additional costs incurred in the context of taking out a loan, in particular fees for processing on the lender's side. If the ancillary credit costs are also included, the annual instalments to be paid result in the so-called annual percentage rate of charge. This is therefore always higher than the corresponding nominal interest rate.
Since there are sometimes significant differences in the ancillary credit costs between the individual credit providers, only the comparison of the APR enables a meaningful comparison of different offers. Accordingly, credit providers are obliged by law (Consumer Credit Act (KKG)) to disclose the effective interest rate.
3. Crowdlending vs. traditional institutions: Nominal interest rates in comparison
Due to their leaner processes, crowdlending platforms are able to offer loans at lower ancillary costs than most traditional institutions. The effective interest rates are correspondingly lower.
And nominal interest rates are also often lower with crowdlending. Unlike banks, P2P platforms do not provide their own capital. This saves expensive capital costs. The savings benefit borrowers and investors.