What’s the Difference?
Nominal interest, also called simple interest, is based on the outstanding loan. In other words: Nominal interest is the interest lenders will charge for the borrowed money. Most of the time, it will be debited from your account quarterly. The lower the outstanding loan amount, the lower the interest, which is thus charged on a pro rate basis.
Effective interest is a notional interest rate calculation. In this interest rate onetime fees as well as running charges should be reflected. It is displayed as a percentage of the principal amount.
The effective interest rate is therefore higher than the nominal interest rate and depicts the full costs. Ancillary costs are, for example, fees for the entry in the land register, administration fees or processing fees.
