Whether for a new car, balancing the current account or renovating the bathroom: With an installment loan, you can finance very different expenses and pay off the borrowed money in monthly installments within a fixed term. But before you take out a loan, you should plan your project carefully and think it through. We tell you what you need to consider when taking out a loan and what tips and tricks you should take to heart if you want to take out an installment loan.
Tip 1: Critically question the necessity
You should only take out a loan if it is absolutely necessary. Because a loan is a long-term obligation that can significantly restrict your financial scope. In addition: unemployment or illness can affect anyone and pose serious financial problems for borrowers. Critically question your desire for a loan. Does it really have to be the new car? Or is the previous one enough to bridge the time until enough savings are available?
Dedicated loans are usually cheaper
If you are convinced of your financing request and, for example, urgently need a new car, you should take out a dedicated installment loan – in this case a car loan. In most cases, these are still somewhat cheaper than installment loans, which you can freely use. Because this freedom banks can pay with an interest premium.
Tip 2: Explore alternatives
You should only knock at the bank when you have explored all other options. An alternative to an installment loan can be a personal loan, for example. In this case, private individuals, friends or relatives become lenders. The advantage: Both sides can benefit from the conditions: the lender because, given the current low interest rate, he can generate more returns than with the classic investment of his money – and the borrower because he usually pays less for the borrowed money from a friend or relative got to. So that the personal loan does not burden the interpersonal relationship, you should draw up an official loan contract and write down all relevant points relating to the term, annual interest and the amount of the monthly installment.
Tip 3: Create a financial plan
The decision was made on an installment loan – but don’t rush anything. Before you make an appointment with the bank or before you submit a loan application online, you should carefully analyze your private financial situation and ask yourself:
- How much credit can I afford?
- What is the maximum monthly charge?
- How long can I pay this rate for?
- And will capital be released in the future, for example through a matured life insurance policy, that I can use to repay the loan?
In order to answer these questions, it makes sense to create a list of all monthly expenses and income. In this way you can easily see the maximum monthly load. However, do not calculate too tightly and plan a monthly buffer for unexpected, spontaneous costs, for example for the repair of the car.
Tip 4: Obtain free information from the KSV
Loans are credit-dependent. Banks will therefore seek information on your creditworthiness before lending. In addition to a regular income, information from KSV or another credit agency such as CRIFT plays an important role. The credit check not only influences the question of whether you are granted an installment loan, but also on what terms.
The following applies: The more positive your entries, the cheaper your installment loan will be. As a consumer, you have the option of receiving free KSV information once a year. You should also take advantage of this before applying for a loan. Because if the KSV information is incorrect, you can have it corrected before contacting the bank and you will receive better conditions.
Tip 5: Compare installment credit online
Compare using the effective interest rate
Always compare offers based on the effective interest rate – the debit interest rate does not reflect all credit costs. Also note: The term must be the same when you compare installment loans.
Of course, interest is payable on an installment loan. Depending on the provider, there can be very large differences in terms of interest rates. In order to find a cheap offer, you should always use an online loan comparison and compare installment loans before taking out the loan. Just enter the desired loan amount and the loan term and you will see numerous offers from different providers at a glance.
The following example shows how much can be saved with an installment loan comparison:
Offer bank A
Loan: $ 10,000
Effective interest rate: 4%
Monthly rate: $ 136.36
Duration: 84 months
Total costs: $ 11,454.17 Offer bank B
Loan: $ 10,000
Effective interest rate: 3%
Monthly rate: $ 131.95
Duration: 84 months
Total costs : $ 11,083.86
This results in a saving of $ 370.31 for offer B.
Tip 6: Arrange a short term
To avoid unnecessarily high interest costs, borrowers should be keen to pay off the installment loan quickly. Therefore, choose the shortest possible term. The monthly rate is then correspondingly higher, but you save a lot of interest and become debt-free faster. Low interest rates in particular tempt many borrowers to choose a long term at a low rate. However, this is not worth it. Because the interest burden is now much higher. And the real interest advantage is often gone. Instead, you should pay off as quickly as possible to get the most out of the low interest rate phase.
Redeem expensive installment loan and use low interest rates
If you have already taken out an installment loan, you can still benefit from the current low interest rate and reschedule your installment loan. With a debt rescheduling, you can prematurely cancel your loan contract and switch to another provider.
Tip 7: avoid additional costs
Interest payments are not only incurred for an installment loan. There are other cost centers where you can save some money with a few tips. For example, it is important that you do not have to pay any additional costs to change your monthly rate. For example, if you get a raise, it is convenient if you can adjust your rate accordingly. However, such adjustments are not always possible free of charge. Therefore, when taking out a loan, make sure that you can change your rate at no additional cost.
Also compare the regulation regarding special repayments. Because with these unscheduled special payments, you can pay off your loan faster in addition to the monthly installments. However, some providers limit the amount and / or number of free special repayments. Therefore, make sure that special payments are generally possible without additional costs.
Many lenders try to sell residual debt insurance to borrowers when they take out a loan. This should protect against insolvency if the borrower becomes ill or unemployed, for example. The catch: Insurance companies that offer providers in combination with loans are often overpriced. If you do not want to do without such insurance protection, you should take out residual debt insurance separately and not in combination with the installment loan. However, consider carefully whether such a policy is really necessary – because residual debt insurance is often not worthwhile, especially with small to medium loan amounts.
Heed tips and save
If you as a borrower take some important tips and tricks to heart, you can currently take out an installment loan at very favorable conditions. However, these conditions should not tempt you to take out a loan lightly. Therefore, critically question your financing request and carefully compare the offers of the providers. You can often find particularly cheap offers online in particular.