Installment loan | Costs, advantages and disadvantages, tips & comparison
Repay a large sum in small monthly installments with an installment loan – for any purpose Many small “snacks” – spread over months or years instead of a large sum: With an installment loan, private individuals and traders can also spend larger amounts without restricting the financial scope too much. The (almost) only requirement is sufficient creditworthiness of the applicant. Who actually writes and advises here? About us On this page What does an installment loan look like? What are installment loans suitable for? Requirements How do you find good installment loans? Where can you get installment loans? Repay the installment loan early?
What does an installment loan look like?
The installment loan is a loan with a fixed term and a fixed interest rate, which the borrower must repay in regular – usually monthly – installments. The installments contain an interest component and a repayment component, whereby the interest component decreases over time and the repayment increases. Installment payments are common for most loans. In this respect, mortgage loans for home finance are also installment loans.
However, the term is used more narrowly and primarily refers to consumer loans. Loans for purchases and private consumption range from a few thousand USD to tens of thousands of USD. The term ranges from one year to ten years. In the case of loan offers, the loan amount and the term can often be freely selected within predetermined ranges. This also affects the rate level.
What are installment loans suitable for?
In principle, installment loans can be used for a wide variety of purposes. In many cases, this is used to finance larger purchases. Installment loans – often also referred to as “modernization loans” – are used even for extensive modernization or renovation projects on the house. Installment loans are often used for debt rescheduling – for example to replace expensive overdraft loans. Specifying a purpose is not mandatory when applying for a loan. Under certain circumstances, however, the information can have a favorable effect on the conditions.
What are the requirements for installment loans?
Regular income is essential for installment loans. Therefore, proof of an employment relationship and the submission of the latest pay slips are almost always required. Often, the personal economic and financial situation is also checked using suitable information.
Proper Credit Bureau information is another prerequisite for installment loans. Real collateral is normally not required. There is an exception to car loans. Here it is common for the vehicle to be assigned as a security. Collateral is sometimes required when the borrower’s credit rating “weakens”. The individual creditworthiness influences the interest rate. If the risk is higher, lenders charge interest premiums.
What to do if the bank declines? If the bank hesitates to lend, adding a second borrower can often help. However, he himself must have a good credit rating. An alternative to this is a surety from a guarantor.
How do you find the best installment loan?
- When comparing loans, you should always look at the effective interest rate, not the borrowing rate. The debit interest is only used to calculate the interest. The effective interest rate, on the other hand, includes other credit costs and cost-effective factors.
- The effective interest rate is a good benchmark. However, it does not show all costs. For example, residual debt insurance, which is often recommended when taking out a loan, is usually not taken into account.
- In addition to the effective interest rate, it is also worth taking a look at the loan terms.
- The possibility of rate adjustments or early repayment without prepayment penalty can also be a selection criterion.
What installment loan can I afford?
The installment loan installments should always be dimensioned in such a way that they do not result in a financial overload. This is the case if, after deducting all expenses (living expenses, housing, mobility, etc.), there is still enough financial scope for payment in installments. This can be determined with a household bill. In most cases, this list is part of the credit check.
With a longer term, the installment is reduced with the same loan amount. The rate can therefore be controlled to a certain extent by choosing the term. A rate that is initially too high may then be sustainable.
Example rate and term Here is a simple example of the relationship between loan amount, installment and term : Let us assume an installment loan of 10,000 USD with an effective interest rate of 7.00%. With a term of 36 months, the monthly rate would be 308.77 USD. If the term is 60 months, however, the rate is reduced to 198.01 USD. In return, the installments have to be paid for 24 months longer and there are higher interest costs.
Where can I get an installment loan?
Installment loans can now be applied for very easily online, in the form of an online loan. Direct and online banks, but also classic branch banks offer this option. Users are guided through an inquiry route on the corresponding website. At the end, the loan application must be printed out, signed and sent to the bank together with the required documents. This then makes the final decision on lending. In addition, numerous dealers and manufacturers also offer financing, often at particularly low interest rates. No discounts can be used for this. Of course, the installment loan is still available at the bank counter.
Car finance: bank or dealer credit? On the surface, installment financing from retailers often appears to be cheaper than from the bank. In spite of the higher interest rate, the bank loan may still be more advantageous because it allows cash discounts to be used by the merchant. This applies in particular to car financing. In this case, the effective interest rate does not help with comparisons. There are special comparison computers on the Internet with which a comparison is possible.
Can I repay an installment loan early?
With installment loans taken out from June 11, 2010, full or partial early repayments are possible at any time. Not even a notice period has to be observed.
However, the lender may calculate a loan. It may not be higher than the interest lost and may not exceed one percent of the amount repaid. With a remaining term of up to one year, the upper limit is reduced to 0.5 percent. Depending on how high the prepayment penalty is, it can be questionable whether the early repayment is actually worthwhile.
What if installment loans pile up?
As convenient as installment loans are, they are more likely to result in many smaller loans piling up into a mountain of debt that will eventually grow over your head. Some borrowers lose track of their loans. In such cases, rescheduling is advisable by combining the existing loans into a new installment loan with sustainable rates. Aid through debt counseling can be a useful way to escape the debt trap.