What is it?

The nominal interest rate is the rate that is typically shown in your contract and in the lender's marketing. It represents the cost of borrowing money but does not include any additional fees.

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How does it affect?

The nominal interest rate gives you an indication of how much the loan will cost. However, since it doesn't include all costs, you shouldn't rely on it when comparing different offers.

What is it?
The effective interest rate is the rate that reflects the actual total cost of a loan. It includes the nominal interest rate and any additional fees, making it a more accurate measure for comparing offers.

How does it affect?
The effective interest rate provides a more accurate picture of the total cost of a loan, which is why it should be the basis for comparison when evaluating offers. For consumer loans, the effective interest rate must be disclosed, but for business loans, it’s often not. Calculating the effective interest rate yourself isn’t easy, but a simplified way is to take your interest costs over a period and add all the fees for the same period to estimate the effective rate.

What is it?
Annual interest rate is a measure used to indicate the cost of interest for a loan over a one-year period. As the name suggests, it reflects the interest costs over a year. Annual interest is the most common way to express interest, and since consumer loans usually have annual interest as the standard, this is generally what people refer to when discussing interest rates.

How does it affect ?
The annual interest rate shows how much a loan would cost you over a one-year period. While expressing it as an annual rate doesn’t change the actual cost of the loan, it’s a useful way to understand the cost. It’s important to check what time period the interest refers to in order to compare offers accurately. If you’re comparing an offer with an annual interest rate to one with a monthly rate, the comparison will be misleading unless you convert one of the rates.

What is it?
Monthly interest rate, like the annual interest rate, is a way to indicate the interest costs of a loan. As the name suggests, the interest costs for a loan with a monthly interest rate are calculated on a monthly basis, meaning the percentage that reflects the loan's cost will be lower than for a loan with an annual interest rate.

How does it affect?
When the interest is presented as a monthly rate, it may initially seem lower than an annual rate. While this doesn't change the actual cost of the loan, it can be misleading. If you want to find out what the monthly interest rate would be as an annual rate, simply take the percentage and multiply it by twelve.

What is it?
Fixed interest means that the interest rate on a loan is locked for a certain period. During this period, the rate will not change, regardless of market conditions.

How does it affect?
A fixed interest rate provides predictability and stability in loan costs since your payments won't change during the fixed period. This can be beneficial in times of rising interest rates. However, the downside is that if market rates drop, you're stuck with a higher rate than what might otherwise be available.

What is it?
Variable interest means that the interest rate on a loan can change over time in line with changes in the market interest rate. A variable rate typically follows the central bank’s rate trends.

How does it affect?
A variable interest rate can lead to lower costs if market rates fall, making it an attractive option during periods of declining rates. On the other hand, it carries higher risk, as loan costs can increase if market rates rise. This makes it less predictable and could negatively affect cash flow if the rate suddenly spikes.

What is it?
Straight amortization means that the borrower pays off the same amount of the loan principal at each payment, in addition to the interest. The interest is calculated on the remaining loan balance, which causes the interest cost to decrease over time as the loan is repaid.

How does it affect?
With straight amortization, payments are larger at the beginning of the loan term when the interest costs are highest. These payments gradually decrease as the loan balance and the associated interest costs decline over time.

What is it?
Annuity is a type of amortization where you pay the same amount at each payment throughout the loan's term. This payment includes both interest and principal, with the portion allocated to interest decreasing as the loan is repaid, while the portion allocated to principal increases.

How does it affect you?
Unlike straight amortization, the payment amount for an annuity loan remains constant throughout the loan term. The interest portion is higher at the beginning but decreases as the outstanding loan balance decreases. As the interest portion shrinks, the principal portion increases, keeping the total payment amount the same each time.

What is it?
A fixed fee – often monthly – is sometimes used in business loans instead of traditional interest as the loan payment. This fixed fee is not dependent on the loan amount or repayment period but is instead a predetermined cost that is paid regularly throughout the loan term.

How does it affect you?
A monthly fee might seem like a simple and predictable payment structure. However, it can make it harder to compare costs with a traditional loan that charges interest. When expressed as a percentage of the loan amount, the fee may seem reasonable. But since the fee does not decrease as the loan balance reduces, the loan's cost theoretically increases as you repay the loan. This is because the fee becomes larger in relation to the remaining loan balance. It’s important to calculate the total loan cost by multiplying the fixed fee by the number of payments over the loan term to get a clear picture of the actual cost.

What is it?
Personal guarantee means that an individual (the guarantor) vouches for a business's loan. If the business is unable to repay, the guarantor becomes responsible for paying off the debt.

How does it affect?
Personal guarantees are common in business loans and can increase your chances of getting approved or securing better loan terms. However, it poses a financial risk to the guarantor, as they become personally liable for the debt if the company fails to repay.

What is it?
A collateral is a form of loan security where the lender has the right to take over an intellectual or physical asset if the borrower is unable to repay the debt. For business loans, collaterals are commonly used as security for larger loan amounts. Examples include business mortgage and commercial mortgage.

How does it affect?
Collaterals provide security for the lender, which can lead to better loan terms for you. However, you risk losing the pledged property if the business is unable to meet the repayment terms of the loan.

What is it?
A cost cap sets an upper limit on the total costs, including interest and fees, that a loan can incur. For consumer loans, there is a cost cap on high-cost credit, where the loan can never cost more in interest and fees than the original loan amount.

How does it affect?
Business loans rarely have cost caps, as they are not regulated to the same extent as consumer credit. If a cost cap is in place, it provides reassurance that the total cost of the loan will never exceed the specified limit.

What is it?
Interest rate differential is a fee that a borrower may need to pay if they pay off a loan in advance. It is used to compensate the lender for lost interest income and is most common with loans that have a fixed interest rate.

How does it affect?
If you repay the loan according to the agreement, the interest rate differential does not impact the cost of your loan. However, it limits your freedom by making it harder to pay off the loan early if you want to. If you prefer more flexibility, it's best to avoid loans with interest rate differential compensation. As a rule of thumb, always avoid loans with this fee if the interest rate is variable.

What is it?
An origination fee is a one-time charge that may be applied to cover any administrative costs the lender incurred when granting the loan.

How does it affect?
If a business loan includes an origination fee, it increases the total cost of the loan, and you need to factor it in when calculating the effective interest rate. Since origination fees are typically fixed amounts rather than percentages, they have a greater impact on the effective interest rate for smaller loan amounts.

What is it?
An invoice fee is a charge that a lender may apply for sending invoices or payment notices to the borrower. This fee is incurred each time the borrower receives an invoice.

How does it affect?
Invoice fees increase the total cost of the loan and should be included when calculating the effective interest rate. Since these fees are charged with each invoice, they have a greater impact the more repayments you make over the loan's term. Invoice fees are less common today due to options like electronic billing or direct debit. If a lender charges an invoice fee despite using electronic billing or direct debit, it could be a red flag.

What is it?
An administrative fee is a charge that lenders may apply for administrative work related to the loan. These fees can vary and may include one-time charges or recurring fees throughout the loan term.

How does it affect?
Like invoice and origination fees, administrative fees increase the total cost of the loan and should be included when calculating the effective interest rate. Their impact depends on the loan amount and term length, with smaller loans and longer terms being more affected. As with invoice fees, administrative fees are becoming less common due to digitalization and automation of administrative tasks.

97 percent of Sweden's businesses are solepreneurs or have fewer than ten employees. Their ability to evaluate financial agreements and lenders is more comparable to that of individuals than to large companies with financial and legal expertise.

Since we believe it should be easy for business owners to make informed decisions, we built Froda using clear agreements, transparent pricing, and fair terms. Unfortunately, this is far from standard when it comes to business loans in Sweden. It’s more often than not that no two business loans are alike.

With The Financing Handbook, we hope to make it a bit easier for business owners to understand what they’re getting into and simplify the comparison of different loan offers.