Effective annual rate (effektiver Jahreszins)
The effective annual rate (effektiver Jahreszins) is the all-in annual price of credit: the nominal rate, compounding frequency, and mandatory fees folded into one percentage. German law (Preisangabenverordnung, PAngV — price indication regulation) requires lenders to disclose it, making it the number for comparing loan offers — the nominal rate alone is always smaller-looking.
Why it matters
Two loans can advertise the identical nominal rate and still cost different amounts, because one compounds monthly and adds a processing fee while the other doesn't. The effective annual rate exists precisely to close that gap: mandatory disclosure folds compounding and fees into one figure, so the Sollzins (nominal borrowing rate) alone can't be used to shop around between offers. BNPL (buy now, pay later) and Dispo (overdraft) advertising leans on the distance between the two numbers, foregrounding whichever one looks smaller — a "0% for 3 months" headline, a modest-sounding daily rate — while the effective annual rate, once disclosed, tells the comparable story.
Worked example
1. Monthly compounding. A loan quotes a nominal rate of 12% per year, compounded monthly. Each month charges 1% (12% / 12), and compounding across 12 months gives (1 + 0.01)^12 - 1 = 0.1268 = 12.68%. The effective annual rate is 12.68% — visibly above the 12% nominal figure printed in the offer, purely from compounding frequency, before any fee is added.
2. A fee pushing the rate further up. An illustrative loan of €5,000 at a nominal 8% per year for one year adds a one-time processing fee of €150. Interest alone costs €5,000 x 0.08 = €400; adding the fee brings total cost to €400 + €150 = €550 on the same €5,000, for an effective annual rate near €550 / €5,000 = 11% — three percentage points above the 8% nominal rate quoted up front. This is a simplified illustration; the exact PAngV calculation method can differ slightly by fee timing and term length, but the direction is consistent: fees always push the effective rate above the nominal one.
Don't confuse with
The nominal interest rate (Sollzins) is the plain percentage quoted per period — the number printed in large type on the offer. It ignores how often interest compounds within the year and any fees bundled into the loan, which is exactly what makes it structurally smaller-looking than the effective annual rate on the same product. A 12% Sollzins with monthly compounding and no fees is already 12.68% effective before a single fee gets added — the gap only widens once mandatory costs (Bearbeitungsgebühr, processing fee; account-keeping fees) enter the calculation.
Check yourself
A loan quotes a nominal rate of 12% per year, compounded monthly (1% per month). Using `(1 + 0.01)^12 - 1`, what is the effective annual rate, in percent?
A loan of €5,000 at a nominal 8% per year for one year adds a one-time processing fee of €150. Approximating the effective annual rate as total cost (interest + fee) divided by the principal, what is it, in percent?
A BNPL (buy now, pay later) ad headlines "0% for 3 months," and a Dispo (overdraft) ad headlines a "daily rate of just 0.03%." What do these two advertised numbers have in common?
Two loan offers both quote a nominal rate (Sollzins) of 6% per year. What can you conclude about their true cost to the borrower?