The most famous form of loan is the installment loan. An installment loan is used for both financial bottlenecks and long-awaited financing plans. The variations are varied: there are car loans, real estate loans and modernization loans, but also a consumer loan when buying a new TV or the classic cover letter in the pub can be seen as an installment loan.
What is an installment loan?
There is a clear legal basis for an installment loan, which every loan contract must fulfill. First of all, it is about a certain loan amount that is paid out in full at the beginning. Sums between 500 and 100,000 USD are possible. However, this varies from provider to provider and also depends on your credit rating.
Such a loan, as the name suggests, is repaid in repayment installments. These are paid monthly, quarterly or semi-annually. The amount of the installments does not change over the entire term and is specified in the loan agreement. In addition to the installments, you have to pay interest. These are also recorded in the contract and may not change over the duration of the loan term.
An installment loan is repaid in a fixed term. It is contractually negotiated how long you have to return the borrowed money. Usual terms are between 12 and 84 months, sometimes up to 120 months, but these are rather exceptional cases.
With an installment loan, you borrow a certain amount of money, the repayment conditions of which are set in advance. Such a loan initially appears to be rather inflexible, but you also have a good overview of the loan and there are no unexpected costs.
Installment loan requirements
You must be at least 18 years old to apply for an installment loan. Under German law, minors are not allowed to conclude credit agreements. You also need a permanent place of residence in Germany. The further requirements depend in detail on the respective bank. However, there are general similarities.
Basically, banks in Germany are obliged to check your creditworthiness when applying for credit. This is to protect consumers from possible over-indebtedness. In addition, banks naturally have an interest in making secure credit transactions. Credit bureau is generally used to check creditworthiness. If there are negative entries in your Credit bureau information, many providers refrain from granting the loan. It is best to check your Credit bureau yourself beforehand by means of self-disclosure. In this way you can delete unnecessary entries if they are no longer relevant.
You must have a regular income to be able to receive an installment loan. Many banks require a fixed income from an employment relationship. In most cases, assignment of wages or salaries is then agreed as security. It is often more difficult for freelancers and the self-employed to obtain an installment loan. If a bank approves a loan agreement in this case, higher interest rates usually accrue.
What does an installment loan cost?
It depends fundamentally on the interest that accrues. Additional costs are only incurred in exceptional cases or are no longer permitted. Processing fees or similar preliminary costs are now legally prohibited. Should such costs arise with a loan offer, you should keep your distance from it and not get involved with the fees.
The amount of interest can vary widely. You can roughly differentiate between two offer variants:
- Offers dependent on creditworthiness with an interest margin: The interest accruing for you depends on your personal creditworthiness. After the bank has checked your Credit bureau score and assessed your income, you will receive an individual offer of interest for the desired loan.
- Offers independent of creditworthiness with fixed interest rates: The interest rates are the same for all customers as long as the requirements for the loan are met. Your credit rating therefore has no positive or negative effect on the interest rate offered. It only has to be sufficient for you to be eligible for the loan at all.
Dependent interest rates also vary depending on which group of people and occupations you belong to. As already mentioned, permanent employees usually have an interest rate advantage, while the self-employed have to pay more on average.
In addition to interest, many providers also offer residual debt insurance for installment loans. Make sure that this is not mandatory for the conclusion of the contract. Such insurance should come into force when you are no longer able to pay off the remaining debt of the loan contract due to illness, death or unemployment. This sounds good in theory, but in most cases it is very expensive. In addition, the conditions of application are often very difficult to meet. Normally, residual debt insurance should be avoided.
What else should you watch out for with an installment loan?
The cost of an installment loan is largely determined by the interest. These become more noticeable the longer the term of the loan. To save costs, you should always choose terms that are as short as possible. Logically, this increases the monthly installments accordingly, but the total interest burden is not as strong. As tempting as low installments with a very long term may seem, the loan is much more expensive. If your financial means allow, you should always choose an installment loan with the shortest possible term.
Also check whether a loan offer allows special repayments. This is less often the case for installment loans, but it can happen. Then you have the option to repay the loan amount beyond the specified installments. Since 2010, borrowers can withdraw from a loan agreement at any time and trigger the outstanding balance. Banks can then demand prepayment penalty, but do not have to. The costs for this are prescribed by law:
- For loans with a remaining term of more than 12 months, the costs may not exceed 1% of the remaining balance.
- For loans with a remaining term of less than 12 months, the costs may not exceed 0.5% of the remaining balance.
The costs of early repayment are therefore relatively cheap. If your cash reserves allow it, you should consider swiftly repaying the loan amount. This way you can keep the interest costs as low as possible.
If you already know exactly what you want to use the loan for, you should take out an earmarked installment loan. When financing a new car or property, you often get an interest rate advantage. Some providers are also specialized in such loans and can offer you very good conditions. By linking the loan to a real asset, the bank has additional security. For example, if you have taken out a car loan, the bank can sell the car in case of insolvency to pay the remaining debt.