Borrowers who opt for an installment loan do so only for smaller loans. So if you want to finance a new car or your vacation with a loan, you have come to the right place. The installment loan also has numerous advantages for liquid property buyers. An installment loan is always taken out when a loan is to be repaid quickly. However, appropriate funds must also be available in this case. The same applies to real estate financing. If you have enough money here, you should also pay part of your mortgage with an installment loan. Only in the event that the property is intended as an investment, an installment loan is not worthwhile because of the lower tax liability. A long-term annuity loan should be preferred here.

The installment loan is paid off from the amount of the repayment installments and the credit period; the interest payments are made separately. If the same repayment rates have always been agreed, the monthly charges are reduced in addition to the interest payments. The fixed interest rate itself is usually between 5, 10, 15 or 20 years, the term is predefined accordingly. In some cases, there are certain criteria for the lender’s use of the loan amount that must be met. For example, the borrower who benefits from a low interest rate who only uses his loan for mortgage lending. Only in this case is the loan approved by the financing bank at all.

The amount borrowed by the borrower is made up of repayment (repayment of the loan amount borrowed) and interest (nominal interest plus various additional costs) and is to be repaid monthly. An installment loan should therefore always be chosen if the necessary liquidity is not available in the short term for a particular purchase or if the current account is overdrawn in the short term. By appropriately choosing different terms, the borrower can determine his individual payment rate accordingly. However, it is also possible to use an installment loan with low interest rates to replace another existing installment loan or an overdraft facility. With such a debt rescheduling, the borrower can save himself high interest payments.

However, most banks today refuse to lend if the borrower cannot provide any collateral. Often this also includes a so-called self-disclosure, in which all financial liabilities must be disclosed. Most credit institutions also require Credit Bureau information. In this document, the previous credit behavior of a person is documented and in this way shows the creditworthiness of the future borrower.

Credit institutions are currently calculating the probability of default on the basis of the so-called score value. This is a statistical value that ranges between 1 and 1000. The score assigns a borrower to one of nine risk groups. The classifications are made according to age, place of residence and the frequency of moving or changing accounts.

Installment loan comparison

Installment loan comparison

You can calculate and compare the interest rates for installment loans with our loan calculator for any loan amounts and terms:

The use of installment loans

The use of installment loans

Borrowers who would like to apply for an installment loan from their credit institution should first inquire about the collateral or which companies are required to grant a loan. If it is car financing, the bank usually requests that the vehicle letter be deposited. If it is a purchase loan, the credit institutions secure their claims by assigning the income to the borrower. In addition to the actual securing of the loan amount, most banks also charge an additional 20 percent for any additional costs that may arise as a result of a delay in payment. In all other cases, the bank also has the option of a guarantee in the case of purchases, in which a third party (the guarantor) guarantees that the creditor will be unable to pay. If the actual borrower is unable to pay, the latter must then step into the outstanding loan amount.

Another way to secure a loan is to take out so-called residual debt insurance. Such coverage is not only cheap, it also protects the borrower in the event of illness or even death. In many cases, the monthly premium for the residual debt insurance is already included in the monthly credit premium. If an insured event occurs, the insurance company either takes over the remaining payment of the loan or the continued payment of the monthly installments. The residual debt insurance is a risk life insurance that pays the installments due in the event of illness or death. So if you only need short-term or uncomplicated, more limited financial flexibility, an installment loan (also called installment loan) is a suitable means. The short processing time is particularly advantageous.

The banks themselves usually give the nominal interest rate (i.e. the actual one) for an installment loan. In addition, in most cases there are two to three percent of additional costs (e.g. processing fees). These additional costs are then expressed accordingly in the effective interest rate. Borrowers should always use this effective interest rate when comparing loan offers. In most cases, in the case of personal loans, the online banks are ahead of the branch banks, since the latter always have internal costs. According to the so-called Price Disclosure Regulation (PangVO), credit institutions are legally obliged to state the initial annual effective interest rate on a loan. So the lower the effective interest rate, the cheaper is not only the loan, but also the loan costs that the borrower has to pay back in monthly installments.

Example 1:

Credit Amount:
10,000 USD
Interest:
4% pa
repayment:
200 USD per installment
payment protection
1st installment: 600 USD Interest portion: 400 USD Redemption share: 200 USD 9,800 USD
2nd installment: 592 USD Interest portion: 392 USD Redemption share: 200 USD 9,600 USD
3rd installment: 586 USD Interest portion: 386 USD Redemption share: 200 USD 9,200 USD
Redemption share: 200 USD 0 USD

Fig. Installment or repayment loan: The loan rate is gradually reduced, the repayment portion usually remains unchanged over the term. The corresponding interest portion of the installment is always calculated on the remaining loan amount.

Example 2:

  • Taking out a loan of 50,000 USD, term 5 years
  • Borrowers must repay this amount of 10,000 USD annually.
  • Interest payments are added, with an interest rate of 10 percent in the first year of repayment, an additional 5,000 USD in interest accrues to the 10,000 USD.
  • Borrowers must therefore repay $ 15,000 annually including interest.
  • In the second year there is still a loan amount of 40,000 USD (50,000 ./. 10,000)
  • Now the burden is falling, since now 4,000 USD have to be paid in interest.

In particular, a high interest charge (for example, through an overdraft facility) can justify the conclusion of an installment loan, although careful calculation and consideration of all contract components should be undertaken. In addition, the offers of the various financial service providers should be carefully compared with each other before the installment loan contract is concluded. There are almost always serious differences in the amount of interest, the term of the contract and the cost of credit. If the interest rate of a bank is higher than that of equivalent providers, it is better to stay away from it. Ultimately, the risk of facing an unmanageable mountain of debt is too great.

Particular caution is required with so-called “lightning credits”, which also fall under the installment credits. In most cases, administration fees are extremely high. If the monthly income plus all the fixed costs incurred are determined before borrowing, then the borrower can see which monthly debit (repayment rate) can be borne. However, a buffer should be installed within this load limit just in case. It is therefore always advantageous to agree on a fixed interest rate. On the other hand, anyone who opts for a vario, check or replenishment loan must constantly expect the bank to change the interest rate.

Initially, these loans seem many times cheaper than an installment loan with a fixed interest rate. However, if there is an interest rate hike within the term, this can quickly lead to total debt of the borrower.

The advantages and disadvantages of an installment loan

The advantage of an installment loan is that the repayment rate remains the same over the entire term, which means that the monthly installment payment decreases over the years. This distinguishes the installment loan from the annuity loan. Another advantage for the borrower lies in the predictability of the loan and the manageable structure of the loan. Due to the fixed rate and the fixed term, the financial burden of the loan can be assessed well from the start. On the other hand, the inflexibility of this type of loan has a disadvantage, because if there is a financial bottleneck for the borrower, e.g. due to unemployment or loss of certain income, the rate can only be reduced under difficult circumstances and almost always at high costs.

Even more problematic is the fact that a borrower can no longer meet their monthly installments. In this case, the lending institution even has the option to cancel the entire loan agreement. In this case, the entire amount of the debt is due at once. Usually only a debt restructuring helps here, and this is one of the most expensive variants.

When purchasing consumer goods, borrowers should make sure that the term is not set too high. Because one thing must not be forgotten: after a short time, the equivalent value of the object decreases. So if you finance a car purchase over 10 or even 15 years, you will only have a very low value after 3-5 years. This means that the installment loan is still worth 15,000 USD, for example, while the motor vehicle is only 8,000 USD. Bad financing with an even worse outcome should the motor vehicle now give up its spirit. The borrower then no longer has a car, but the loan must be financed without a car.

Important: A concluded credit contract can be revoked in writing within two weeks of signing it (Sections 495, 355 BGB). However, this period only applies in the event that the borrower has been expressly advised of this revocation option. If this has not expressly happened, the borrower has the option to withdraw from the contract even after this two-week period.

 

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