Effective rate: the key comparison figure, but not the only one

The annual percentage rate expresses the total cost of a consumer loan as an annual percentage. Only compare it for the same amount and the same term.

What the ordinance includes

Under § 16 (3) PAngV, the total cost includes the interest payable by the consumer and all other costs that arise in connection with the loan agreement and are known to the lender. The provision names three of these explicitly: brokerage costs, the costs of a specific account including its means of payment where holding that account is a condition of the loan, and the costs of a property valuation where it is required for the loan to be granted.

• Interest
• Loan brokerage costs
• Mandatory account and associated means of payment
• Required property valuation

And what is expressly left out

§ 16 (4) PAngV lists what is not included in the total cost. Two of these points are decisive for comparisons. First, the costs of insurance and other additional services that are not a condition for granting the loan at all or on the terms offered — so voluntary payment protection insurance sits outside the effective rate. Second, the costs incurred if you fail to meet your obligations, meaning reminder and default charges. Notary fees, land register fees and costs that would arise with the purchase anyway are also excluded. The effective rate is therefore a very good comparison figure for the loan itself — but not automatically for everything in the same signing folder.

• Voluntary insurance and additional services
• Reminder and default charges
• Notary fees and land register fees
• Costs that would also arise with a cash purchase

The assumption behind the figure

Under § 16 (2) PAngV, the calculation assumes that the contract runs for the agreed period and that both parties meet their obligations on the agreed terms and dates. The effective rate therefore describes the scheduled course of the loan. If you repay early — which § 500 (2) of the German Civil Code (BGB) entitles you to do at any time — the total cost is reduced under § 501 (1) BGB by the interest and costs for the remaining term, and the actual course differs from the stated figure. This is not a contradiction but the difference between a standardised comparison figure and your actual repayment.

Why the total amount payable belongs with it

The effective rate is a percentage relating to one year. It says nothing about how many euros are repaid in the end — two offers with an identical effective rate produce very different total amounts payable if their terms differ. So read both figures together and only compare offers for the same amount and the same term. Anything else compares two different contracts rather than two prices.