Despite the current low interest rates, taking out a loan should never be rushed – at least two key data of the loan should be carefully considered before applying: the amount of the loan required and the period in which the entire amount of money is to be repaid to the bank – the so-called loan term.
The loan term determines the amount of the repayment installments
While the loan amount required is usually very easy to determine, the term of the loan must be chosen carefully. Depending on the bank, other loan characteristics, such as the amount of interest and the total cost of the loan, may be affected by the loan term. The key credit detail, which is determined by the term, among other things, is the monthly repayment rate.
Basically, the longer the term, the lower the monthly charge from the repayment rate, but the higher the total cost of the loan.
The simple reason is that the borrower not only pays part of the borrowed money to the bank every month, but also loan interest. A short loan term increases the monthly installment, but it also reduces the total loan costs. A good approach to solving the problem of the appropriate loan term is therefore always to answer the following question: How much money can be spent each month on repaying the loan?
Budget bill helps to set loan term
The simplest and quickest way to determine the correct monthly rate is via a so-called household bill: the actual regular income is entered in this simple income-expenditure account and compared to the usual monthly charges. The balance of this simple calculation corresponds to the maximum monthly rate that can be paid for the loan repayment. With the help of the loan amount and repayment rate, it is then easy to determine the appropriate term for the individual financing request.
Once the optimal term for your own financing request has been determined, the comparison of different loan offers can begin, because weighing up the various interest offers of the banks against each other only makes sense for loan offers with the same loan amount and the same term.