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Interest rates, margins, repayment methods

What is a fixed interest rate loan?

When a loan has a fixed interest rate, the interest rate remains unchanged for the duration of the agreed period and does not change, for example, when general interest rates change.

What is a loan tied to a reference rate?

The interest rate on loans tied to a reference rate varies: if the reference rate is, for example, the 12-month Euribor, the interest rate will be revised every 12 months. The most commonly used reference rates are the Euribor rates and banks’ own prime rates. Changes in the interest rate will affect the total cost of the loan.

What is the loan margin?

The loan rate is not exactly the same as the reference rate, as the bank adds on top of the reference rate its own additional rate, i.e. its margin. If, for example, the reference rate is 1.50% and the bank’s margin is 1.20%, the interest rate on the loan for the customer is 2.70%.

What is the actual annual interest rate?

The actual annual interest rate includes all other expenses arising from the loan in addition to the interest itself. Such costs may include, for example:

  • commission on credit
  • an arrangement fee and
  • a service fee.

The actual annual interest rate is calculated using a standard formula. The lender is obliged to state the actual annual rate in all marketing and in the terms and conditions of the loan.

For each loan that is taken out, the lender generally charges the customer various fees.  The size of these fees depends on the size of the loan, its terms and conditions, and the lender.

What are an annuity loan, a fixed instalment loan and a fixed period loan?

In an annuity loan, the loan is repaid in instalments of the same size, consisting of a repayment of the loan capital and an interest portion. The size of the monthly instalment changes in line with changes in interest rates, but the loan period remains unchanged.

In a fixed instalment loan, the loan is repaid in instalments of the same size, consisting of a repayment of the loan capital and an interest portion. The size of the monthly instalment remains unchanged in line with changes in interest rates, but the loan period changes.

In a fixed period loan, the loan is repaid in instalments consisting of a fixed repayment of loan capital and an interest portion that changes as interest rates change. The interest is calculated on the remaining capital. The size of the monthly instalment changes in line with changes in interest rates, but the loan period remains unchanged.