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What is APR for?
It is not always easy to compare the borrowing terms put before you by a bank or credit institution. You can easily get lost in a sea of different and diverse offers. Which figure should you focus on? The nominal rate, which is the one that appears on your loan agreement and that you have to actually pay each month? Unfortunately, that is not enough. In order to know exactly how much you will have to repay and compare the various loan offers effectively, you should also look at the APR.
The annual percentage rate of charge (APR) allows you to work out the total cost of a mortgage or consumer loan. It includes not only the interest but also all associated fees such as application fees, insurance fees, guarantee fees or mortgage fees. It does not, however, include any notarial fees in the case of a property loan.
Enabling a Europe-wide comparison
The APR condenses the cost of the loan into a single percentage, making it easy to compare with rival offers in Luxembourg or other EU countries. The APR is used Europe-wide and calculated by all European banks using the following standardised method: (Total amount to repay – Loan amount)/Loan amount x 12/Total number of monthly instalments = APR.
Since the APR is the interest rate of a loan, it can be fixed, variable or adjustable. A fixed APR means consistent monthly instalments over the duration of the loan. A variable APR means that the monthly instalments can vary depending on fluctuations in a benchmark. Adjustable-APR loans often offer lower monthly instalments to begin with, but these may increase over time.
There is also an APR for bank overdrafts. More commonly known as agios, this represents the interest rate on the sums the bank lends to overdrawn accounts. This APR is difficult to calculate, and therefore to compare, because the amount and duration simply cannot be known in advance.
In some European countries, including our neighbours in Belgium and France, there is an APR ceiling (maximum loan cost) beyond which a loan cannot be approved. Any lender exceeding this limit could face legal action.
Careful! The APR doesn't cover everything
The APR might be a very useful indicator, but you still need to pay attention to all aspects of a loan offer. It is not strictly true to describe the APR as an "all-in" price comparison tool. The APR does not include, for example, optional loan insurance or certain non-negotiable elements such as deferred payment or penalties for early repayment.
In short, by all means look carefully at the APRs on offer to you, but do not overlook other terms and conditions.
12/2021
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How do you plan your home loan project in the face of rising interest rates?
War in Ukraine, the economic slowdown, soaring inflation: in these uncertain times, it's not always easy to make the right decisions, especially when they concern home loans. What should you look out for if you want to become a homeowner or if you still have a loan to repay?
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Renting or buying a property when arriving in Luxembourg?
The answer depends on how long you intend to stay in Luxembourg. If you stay in the country for a short time – less than 5 years-, renting is the best option. Owning your own home in Luxembourg is very expensive and not a very profitable short-term investment such as it is in other countries, even if the Grand Duchy is facing rising pressures on the housing market.
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Is insurance for the remaining balance due compulsory?
Accurately quantifying the cost of insurance for the remaining balance due is difficult, because in practice it is calculated on a case-by-case basis. It depends on your loan. The higher your capital to insure, the higher the premium will be.