- Short terms are cheaper: the shorter the term, the cheaper the loan interest to be paid. A fistula must therefore always be paid back as quickly as possible, but without overpaying yourself.
- The loan term is usually fixed: As a rule, the loan term is fixed in the contract. It results from how much you can repay per month until the loan plus interest has been paid off in full.
- The term can be shortened: With an early repayment or special payments, the loan term can also be shortened. However, this option must be agreed with the bank in the contract.
What consumers should know about the term of a loan!
The loan term is the period agreed in the loan agreement, over which interest and principal payments are to be made until the loan is fully repaid. Most loans have a fixed loan term. The overdraft facility on the checking account is an exception. Here it is up to the borrower when the loan will be repaid.
A classic installment loan is usually concluded for a fixed term with fixed monthly installments. The personal financial situation should ensure that you are able to repay the agreed credit rate on time at any time.
The credit term for an overdraft facility has no fixed credit term, but a credit limit that can be used to the maximum. However, the term of an overdraft facility should be kept short, otherwise it can be expensive.
With a large number of loan offers, it is possible to choose from different maturity options. What you should pay attention to – this is what follows.
Loans with a short loan term are often cheaper
In many cases, the interest rate increases with the repayment term. Interest is then payable on a ten-year loan than on a five-year loan. There are several reasons for that. On the one hand, there is usually a non-flat interest curve on the capital market. The banks base their interest rates on this because they refinance themselves there. Secondly, in the case of loans with a longer term, the bank’s capital is also tied up longer and cannot be invested in any other profitable way.
In addition, the risk increases that payment disruptions or other unfavorable developments occur. This is taken into account with a corresponding “surcharge” for the interest rate, which increases the longer the loan term is. It also depends on the general interest rate situation. Nevertheless, if you choose a “short-runner” for your loan, you have a good chance of an interest rate advantage.
Relationship between loan amount, term, interest rate and rate
There is a mathematical relationship between the loan amount, interest rate, loan term and monthly interest and repayment rate. For a given interest rate and loan amount, the shorter the loan term, the higher the rate and vice versa.
A simple example:
A loan of USD 10,000 with 5% (effective) interest rate leads to a monthly installment of USD 188.71 over a period of five years. At ten years, it is only 106.07 USDos.
The monthly installment is therefore significantly lower, but the installments are paid much longer. The realization is that the rate can be influenced by the choice of the loan term. In this way it can be adapted to personal financial performance.
How long should the loan term be best?
“As short as possible, as long as necessary” – this is the recommendation for choosing the loan term. The shorter the term, the lower the interest costs to be paid. In the above example, a total of USD 1,322.74 in interest is payable on the five-year loan, while USD 2,727.86 is payable on the ten-year loan – more than double. Those who pay off faster are better off economically.
However, the rate must be sustainable. This can best be determined with a household bill. After deducting expenses for living expenses, housing, mobility and other obligations, there must be enough of the monthly income to be able to pay the installment.
Consider personal financial situation
It should be ensured that the personal financial situation allows the installment to be repaid on time. A safety reserve should also be taken into account. If the rate is too high, the only option left is to choose a longer loan term until it is sustainable.
What are the usual terms for loans?
With loan offers, it is common for borrowers to choose between several term options. Each bank determines the bandwidth itself. With the typical installment loan for purchases, the possible terms range between 12 months and ten years. Installment loans during the year – for example over just six months – are comparatively rare.
With so-called short – term loans, the term is only a few weeks to three months. These loans are only intended as a bridge and are usually repaid in one sum.
Mortgage loans, on the other hand, which are used for mortgage lending and often involve large amounts of credit, have very long terms. Five years form a lower limit here, but terms of ten, fifteen and twenty years or even longer are also possible.
Early repayments can shorten the loan term
Even after a loan agreement has been concluded, borrowers have the option of influencing the loan term – through early repayment. If part of the loan is repaid early without the rate changing, the term is automatically reduced.
However, the unscheduled repayment must also be permitted – if possible without prepayment penalty. Otherwise it usually doesn’t pay off. In some loan contracts, subsequent rate adjustments are also possible. The loan term is shortened at higher rates and extended accordingly at lower rates.
Determine the loan term using the loan calculator
Nowadays, loans can be calculated very well using a loan comparison. By specifying the desired loan amount and the interest rate, the resulting monthly rate can be calculated immediately for a selected loan term.
The rate can then be influenced by changing the runtime information until a sustainable level is reached. The loan term for this is then the one that should be considered.