The right amount of installment is not that easy to determine when making a loan.
First of all, the bank only allows a certain maximum maturity and therefore only a certain minimum installment amount. In addition, the installment must match your own household budget. Third, the overall burden of interest increases with a longer term. A low installment costs more money.
The rate specifications of the banks
Banks and credit intermediaries usually offer terms of between 12 and 84 months, more rarely up to 96 or 120 months.
The chosen term determines the installment amount and the total cost of the loan. With a loan amount of € 10,000 and a nominal annual interest rate of 6.5%, which seems realistic for consumer loans for free use in 2018, the following values result:
- 36 months term: monthly fee € 306.49, total cost € 1,033.65
- 48 months maturity: monthly charge of € 237.15, total cost € 1,383.18
- 60 months term: monthly fee 195.66 €, total costs 1.739,69 €
- 96 months term: monthly fee € 133.86, total cost € 2,850.78
Of course, lower costs would be desirable because of a shorter duration, but with that, the monthly rate increases significantly. These must be able to afford the budget. Only by calculating the revenue and expenditure can it be determined how much room is left for a credit installment.
Which loan rate does the household budget tolerate?
The bank also wants to know what rate the budget can afford.
In addition, it checks in general by a credit bureau query, whether the applicant is creditworthy. The income must also be proven. In apparently difficult cases, even banks require a budget bill.
Even without this requirement, credit applicants should make it for themselves. It helps a budget book, whose guide is complex, but very useful. The budget should list all regular and quarterly or annual revenue and expenditure.
These include salary and income from sideline or rental / leasing, expenses include rent, insurance, purchases, other loan installments, special expenses for purchases, gifts and vacations, telecommunications and mobility costs, and regular and irregular spending on hobbies.
Irregular, quarterly or annual costs and revenues are extrapolated to the year, divided by 12 and allocated to the month. From these calculations results the household budget. Now it has to be ascertained what room for further credit exists.
If, for example, this margin is a maximum of € 200 and the instant loan is to be raised above € 10,000 at a nominal interest rate of 6.5%, the term must be at least 60 months.
Which risks arise from a poorly selected credit rate?
An unadapted rate carries various risks.
It should not be too low or too high. Both variants can turn out to be counterproductive or dangerous. An unadapted rate carries various risks. It should not be too low or too high. Both variants can turn out to be counterproductive or dangerous.
People often choose a very low rate because the loan should cost as little as possible per month. This is not only more expensive, it also threatens the credit default in the long term (see below).
Even those households who want to repay the loan as quickly as possible and therefore choose a high rate with a short term, thus taking risks. In detail, these can be represented as follows:
Risks of too high rate:
- Unexpected bills can not be paid because the financial leeway is exhausted by the repayment of the loan installment.
- The budget can not accept any further financing. There is no room for one more rate.
- Repeated, though irregular loads such as the repair of the car or a household appliance can not be paid on time. At worst they are stuttered in (expensive) minirates.
Risks of too low a rate:
- The increased costs caused by the interest over long term burden the household budget.
- If the borrower loses his job in the next few years during the repayment period, the loan default situation threatens.
Conclusion on the credit rate
A credit rate needs to be well considered. If the borrower has found the bank with the best conditions, he can control the installment amount over the term. Some banks offer a break for difficult cases, but not every lender offers. In addition, the installment break extends the term and thus increases interest rates again. It should only be used in really urgent situations.