What is a good interest on a loan?

The interest rate consists of the bank’s margin and the reference rate of interest. Other factors that affect the costs associated with your loan may include account management fees, monthly fees, service fees or start-up costs.

In this article, we will concentrate on different interest rates associated with different types of loans or credits, such as mortgages, car loans, consumer credits or credit card debts. We will also tell you everything you need to know about bank interest rates.

Many different factors affect the interest rate, such as the general interest rate at the moment, the market situation between competing banks and the amount of credit you applied for, as well as the planned repayment period.

The interest rate that you get on your loan depends on many different factors

The applicant’s estimated borrowing power or solvency have a significant effect on the loan costs. A consumer’s estimated solvency tells the bank how likely they are to be able to repay the loan in accordance with the agreed payment schedule. 

Credit providers determine consumers’ solvency by carefully examining each applicant’s financial situation and their past payment behaviour. Banks use the generated report to make decisions regarding whether they will grant the loan or credit or not, or to calculate the interest rate offered to the applicant. Generally, the lower your interest rate is, the less fees you will pay for your bank for the money you borrowed. 

Which individual factors affect the estimated solvency and thus offered interest rates? Credit providers may look at an applicant’s employment status, education, housing status, marital status or any wealth or assets they may have accumulated. They will also want to know about any previous credits or loans the applicant has taken out, which credit providers they have been acquired from and the payment history associated with them. 

Credit providers are, naturally, interested in applicants’ employment status and income, since especially applicants with continuous, stable wage or pension income are seen as trustworthy and likely to pay off their loan in accordance with the agreed payment schedule. 

Even more important than the number on the applicant’s paycheck is, however, the ratio between their income and expenses. The applicant should be able to pay the loan instalments with their regular income. When calculating an applicant’s available funds, the banks do not generally take into account income that is considered to be irregular, such as commissions or additional bonuses. The purpose of the loan, as well as the loan type, also have a significant effect on the interest rate. Keeping this in mind, you should always remember to fill out your loan application  carefully.

You can also take our loan stress test to reveal whether your personal economy can withstand the rising interest rates.

Mortgage interest rate

Mortgages refer to loans taken out in order to purchase residential buildings, housing shares or real estate. Mortgages are one of the most common loans in Finland, and according to the Bank of Finland, at the end of 2019, Finnish households had taken out more than EUR 100 billion in mortgages. 

The interest cost of a mortgage consists of a reference rate, bank’s margin, and different payment-related fees, such as billing or account management fees. The interest rates on mortgages have remained low for quite a long time. In July 2020, the average mortgage interest rate was 0.72%. 

However, since the loan amounts in question are large sums of money, it pays off to compare the available mortgage offers and their interest rates and annual percentage rates to find the best option. You should also find out if you are entitled to either complete or partial tax deduction for the interest on your mortgage.

When a credit provider calculates the interest rate for a mortgage, they take into account various different factors. Being in a relationship or having more than one person repaying the loan may be beneficial to the applicant, because this means the loan will have two guarantors instead of just one borrower. 

Applicants who already own a home are generally considered to be more reliable in terms of repayment than renters, but this does not mean that loans would not be granted to applicants seeking to purchase their first home. In this case, the offered interest rate may be affected by a state-issued guarantee which is offered to first-time home buyers in Finland. 

A good repayment capacity tends to lower the individual interest rate, but especially when it comes to mortgages, location also matters. Granting a loan for a home in a larger city is a safer option for the credit provider, because if the apartment needs to be sold in the future, this will be significantly easier in a city than a smaller locality that does not attract new inhabitants as well. In other words, the estimated demand for the apartment is also reflected in the interest rates offered. It may either raise the rates or lower them.

Interest rates for car loans

Car loans can be granted as either secured or unsecured, and their interest rates may vary considerably. Instead of the car the applicant is looking to purchase, they can also use their apartment or secondary residence as a collateral.

However, many consider pledging their home as collateral to a car loan to be a last-resort option, since using the car the applicant is looking to purchase as a collateral is oftentimes good enough, or they are able to acquire an unsecured car loan with a good interest rate, making it unnecessary to arrange any separate collateral for the loan. 

Car dealerships often advertise low-cost financing offers to their customers. These may seem like a convenient option at first glance, but it is a good idea to look into options offered by other credit providers, such as banks or financial institutions, instead of simply choosing the first available financing option.  For example, banks may often offer financing at much better interest rates than car dealerships. It is often a good decision to acquire your car loan from a different operator than the car itself. Interest rates on car loans range from 4% to 7% on average, but the matter is not quite as simple as it sounds.

Applicants who are looking to acquire a car loan should be aware that car loans are not fully comparable to other loans or credits available on the market. According to the Finnish Consumer Protection Act, annual expenses related to unsecured loans, excluding interest, may not exceed the amount of 150 euros. The law in question does not, however, apply to car loans where the car is used as a collateral. The start-up fees for such loans may be quite high, and the monthly fees may be far higher than those associated with other financing options available. 

In addition to the interest rate, applicants looking to acquire a car loan should be aware of the so-called effective interest rate, more commonly known as the annual percentage rate. For example, a five-year €10,000 car loan may have a nominal interest rate of 5.9%, but taking into account the start-up fee 249 euros and the monthly 12-euro billing and account management fees, the actual annual percentage rate for the loan becomes 9.85 per cent. 

Interest on consumer credit

As the name implies, a consumer credit is an unsecured or secured loan intended for consumer use. Consumer credit usually ranges from €1,000 to €60,000 and is repaid over an average of 1 to 15 years. Generally speaking, it can be said that the smaller the loan, the higher the interest rate. Correspondingly, a larger loan oftentimes means that the applicant will be offered a lower interest rate.

Interest rates offered for consumer credit are, however, affected by many other factors than just the loan amount. As with mortgages, the factors affecting the interest rate include the applicant’s financial situation, as well as the competitive situation between different consumer credit providers. In September 2020, there was significant variation in the interest rates for unsecured consumer credit. The agreed interest rates varied by more than 17 per cent between different banks. During 2020, however, credit providers may only charge a maximum of 10% interest due to a temporary interest rate cap.

If there are such huge differences between different consumer credit providers, what sort of interest rate can be considered a good deal for the applicant? Even though the phrase “the lower the interest rate, the better” is true in principle, lower interest rates simply are not available to everyone. Again, the applicant’s solvency has a significant effect on the offered interest rate, but other banking history may also be considered. If an applicant who is considered to have a good or average solvency applies for an unsecured loan of €10,000, a good interest rate would be somewhere between 6 and 9 per cent. However, if the applicant does not, for example, own a home, does not have a stable job or have any other factors that back their solvency, an interest rate of 10 to 12 per cent can be considered a quite good and realistic offer.

Credit card interest

Even though most people have a credit card in their wallet, not everyone is aware of the interest rates or other additional fees associated with using them. Similarly, people often do not compare different credit card interest rates available to them before settling on a certain credit provider, even though they should be compared just as carefully as mortgage and consumer credit interest rates. 

If you usually repay your credit card debt on time and within the interest-free period, fees and interest rates are probably not as significant to your personal economy. On the other hand, if you tend to pay off your credit card debt slowly or in smaller instalments, interest starts to rack up more quickly and will play a greater role in the accrued credit costs. The difference between the annual percentage rate of the most expensive and cheapest credit cards can be more than 20%.

A good interest rate for a credit card

Even with credit card interest rates, you should always pay attention to the nominal interest rates and annual percentage rates. 

Most credit card providers advertise interest rates of roughly 10%, with some providers offering slightly lower and some slightly higher rates. When you take into account the various different processing fees associated with the credit card, such as billing fees or annual fees, the effective interest rate is often around 15%. 

Generally speaking, a credit card agreement with a good interest rate is comparable to other types of consumer credit in terms of interest rates and other costs. But if you find yourself constantly making purchases on credit, there are probably better alternatives available on the market than card credit. 

Interest rates for instalment plans

Paying in instalments is a financing option that many recognise from e.g. online stores. Instalments allow the consumer to divide the price of the purchase into several monthly payments. Many instalment plans include an interest-free period of 14 or 30 days, but many consumers wish to spread their payments over a longer period of time. For this reason, the interest rates offered for instalment plans do matter, even if the purchases made with them are usually less significant. 

If an online store only offers one instalment option, the consumer is not able to easily compare interest rates before their purchase, but will have to simply take or leave the single option available. However, a smart consumer will compare offers and total prices for the purchase including financing and delivery costs between several different online stores before making their decision. 

If you do not pay close attention to the interest rates offered for your instalment plan, they may make for an unpleasant surprise once it is time to pay up. The reason for this is that the interest offered for instalment plans are oftentimes not very low: they are almost invariably at least 15%, and in most cases closer to 20%, which is the also the highest interest rate allowed under the Finnish Consumer Protection Act. 

So, if you are looking to make an online purchase using an instalment plan, a good interest rate is currently around 15%, but the annual percentage rate will almost always be higher than this. In addition to the interest rate, you should always consider if paying in instalments is the best option for you in the first place. When it comes to online purchases, for example, using a credit card or applying for a consumer credit may be a better choice, as the total cost of paying in instalments may be more than twice as expensive as either of these options. 

Comparing interest rates pays off

The lower the available interest rate is, the less financing costs are accrued for the amount of money loaned. 

The definition of a low or a good interest rate varies considerably based on the type of the loan or credit. An interest rate of 15% would be unprecedented on a mortgage, but for card credit or instalment plans, it is considered business as usual. 

Interest rates on, for example, mortgages or consumer credit also vary based on the applicant’s solvency. What can be considered a good interest rate thus varies also on an individual level. For credit cards, car loans and instalment plans, the interest rates are often fixed regardless of the applicant’s credit history or other factors. 

If you are considering applying for a loan or a credit, always find out what the current average interest rate is for the loan type in question, and be sure to carefully compare loan offers from different banks and financial institutions. This way, you can be sure that you will not be accepting a less than optimal offer with higher than average interest rates. Keep in mind, however, that a low interest rate does not yet guarantee that a certain loan is the cheapest possible option.

With Sortter, you can easily compare different financing options and apply for a loan. Our service presents you with a clear breakdown of all costs, allowing you to see all interest rates and fees associated with a loan or credit offer.