Two numbers, one loan — and one important difference
When you look into taking out a loan, you often see two different percentages side by side: the nominal interest rate and the effective annual rate (sometimes called the APR, short for Annual Percentage Rate). They sound similar, but they do not mean the same thing. And that difference can decide whether a loan ends up costing more, or less, than it first appears.
Don't worry: you don't need to do the maths yourself. You just need to know what to look for. That is exactly what we explain here, step by step.
What is the nominal interest rate?
The nominal interest rate is the pure interest rate charged on a loan. It tells you what percentage of the borrowed amount you pay in interest each year — interest only, with no other costs included.
For example: if you borrow money at a nominal rate of 4.00 percent, then 4.00 percent per year is the pure interest cost used in the calculation. Simple enough — but that is exactly the point. The nominal rate only tells part of the story.
What is the effective annual rate?
The effective annual rate goes further. Alongside the pure interest, it also includes all the other costs tied to the loan. These typically include:
- one-off processing fees (costs the lender charges for arranging the loan)
- the exact timing of your repayments — whether you repay monthly, quarterly or yearly affects the real cost
- any other fees set out in the loan agreement
The effective annual rate brings all of this together into a single percentage. That is why it is usually higher than the nominal rate — it shows what the loan actually costs you, not just the interest portion.
Why do the two figures differ?
Two loans can carry the same nominal rate and still end up costing different amounts. The reason is usually different fees or different repayment terms. The nominal rate alone will not show you that. The effective annual rate will.
In many countries, lenders are legally required to state the effective annual rate on every loan offer — precisely so that you, as the borrower, can see the real cost and compare offers fairly.
A worked example
An example makes the difference easier to picture. Say you borrow 10,000 euros over a term of 4 years.
The lender states a nominal rate of 4.00 percent per year. Applying that rate roughly across the whole term gives you around 800 euros in interest costs (a simplified calculation — in practice, the outstanding balance falls with every repayment, so the real interest is spread a little differently).
Now add a one-off processing fee of 200 euros, deducted when the loan is paid out. This fee never shows up in the nominal rate — but it does show up in the effective annual rate. As a result, the effective annual rate in this example rises to around 4.50 percent.
The gap between 4.00 and 4.50 percent looks small. But it shows something concrete: instead of the roughly 800 euros you expected, you actually pay around 1,000 euros for this loan over its term — the 800 euros in interest plus the 200-euro fee. Without the effective annual rate, that extra cost would have been easy to miss.
Why you should always compare loans using the effective annual rate
When you weigh up several loan offers, do not look at the nominal rate alone. It only shows part of the picture. The effective annual rate shows the full cost in a single number — which is what makes offers genuinely comparable.
A low nominal rate with high fees can end up costing more than a slightly higher nominal rate with no extra costs. Only the effective annual rate makes that visible.
In short
If you would like an overview of different loan types, you can find one at /en/loans.