# Initial APR: calculation and significance

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Of the Initial APR is an important factor in credit agreements. By law, it must be listed in all credit agreements and shows the annual effective interest rate as a percentage. For long-term financing such as real estate loans the initial APR applies only for a fixed period, the so-called Fixed-interest period.

After that, the borrower must renegotiate the interest rate or take out a new loan. The initial APR is made up of various components, such as the nominal interest rate (lending fee), processing fees, repayment and disbursement rate. Other fees such as residual debt insurance may also apply. The duration of repayment can also have an impact on the initial APR; as a rule, it increases with the repayment duration.

Consumer loans often have a fixed loan rate that does not change, but for some loans it may change.

## Definition: What is the effective interest rate?

The effective interest rate describes the interest on loans including all costs incurred. To calculate the initial APR, fees, charges and exchange rate gains, for example, are also taken into account. The costs are then related to the initial loan amount.

So, in terms of the credit, it is a total annual cost. It is composed as follows:

## Initial APR= (borrowing rate + ancillary costs)/ loan amount

The amount of the effective interest rate depends on the Length of the credit period and the amount of ancillary credit costs (e.g. land charge, or notary fees in the case of construction financing). The basis for the effective interest rate is the nominal interest rate (borrowing rate).

The nominal interest rate therefore only shows the charges for interest in relation to the loan amount disbursed. The effective interest rate, on the other hand, includes all costs associated with the loan. When you borrow money from a credit institution, you should therefore always compare the effective annual interest rate. In doing so, you have the Comparison of credit conditions now easy: Banks have been required to disclose the initial APR since 2016.

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