The faster you pay off your loan, the more favorably you can finance it. This procedure is known to every borrower and contributes significantly to choosing loan terms as short as possible. Nevertheless, the favorable interest rate with a short credit period also has a risk that you should not underestimate.
Due to the much cheaper credit in comparison to the loan with a long term, some borrowers tend to overestimate their financial background in terms of the amount of the installment. How to determine the appropriate loan term and what factors you should include, you will learn in this article.
The loan term is not primarily based on your income, but takes into account the monthly fixed costs in euros, but also the necessary reserves within the repayment period. If you are thinking about a short loan term, you should choose the best framework for you and make an accurate calculation of the possibilities.
How long should you choose the term for the loan?
For urgent loans, the terms are generally very short, so you can not favor major problems here. The situation is different for a car loan, for a debt restructuring or for a loan to buy real estate. Liabilities with larger sums require that you think in perspective and weigh whether you can still pay the loan installment possible today in 10 or 15 years.
The loan term covers the entire period of repayment and should be compared to the rate and interest in the comparison taken. If the margin in your finances is high, this circumstance may also affect the loan term and thus the repayment rate. If the money remaining at the end of the month is rather tight, you should refrain from a shorter credit period despite more favorable interest rates and secure yourself with a precise calculation.
The amount of the installment must not only fit your current life, but also remain affordable in times of lower income or focus on extraordinary expenses. You can favor this condition by controlling the term and schedule your loan so that it is sustainable through a perspective and pointed pencil calculation.
Long credit period, a higher interest rate
Even if shorter loan terms are advantageous and a longer schedule for repayment is accompanied by a higher interest rate, make a decision that suits you best. If the bank gives you a choice in determining the term, you should use this option and rather pay a few euros more interest than get into trouble with the installment payment.
Also with regard to free unscheduled repayments or a temporary suspension, or reduction of the rate, you as a borrower must ensure that you repay the borrowed money in the agreed time period. In an online comparison, you can go through different options and look at the comparison of the interest versus the repayment period for the loan.
However, if your financial background allows it, a longer loan term is not necessary and you can take advantage for a favorable interest rate.
Borrower can achieve term shortening through higher repayments
The ratio of interest and total amount for the borrower becomes most striking in the case of a loan, the amount of which illustrates the differences. The example of real estate financing shows how much influence the loan term has on the cost of the loan and what options you have to save by shortening the term.
Even a few euros payment per month more can lead to a significant reduction in your interest rate and that you get your loan at preferential conditions. Flexible loans with a free unscheduled repayment can also lower the loan term and save you money until the end of your debt.
How to choose the right loan term
There is no blanket recommendation on how long a loan should run. Because the optimal loan term is based on your available finances and your expenses, which are used to calculate the loan term. In order to exclude false estimations of your finances, a reputable bank will set aside for a single applicant, in addition to the monthly fixed costs, an amount of about 1.000 euros, which must be available for food and living expenses, but also for separate purchases.
This amount does not have to correlate with your real expenses, but is an average value in euros that the bank estimates based on its experience values. For the right term, you should be honest about your expenses and not sugarcoat anything.
Even if you get cheaper interest rates on a faster amortizing loan, you may run into problems within the loan term. In a consultation with the bank or financial services provider, you will get helpful tips and recommendations on how to choose a good loan term and make the best decision compared to other options.
Variable term? Reduce the amount of installments without additional costs
Actually, your loan term is a fixed amount that you set at the time of application. But there are some ways to shorten your loan in the repayment period or extend it if necessary. Since the amount of the installment and the repayment period are mutually dependent, a change in the loan term can primarily be made by changing the installments.
With flexible loans, you can increase the installment amount, but in some cases you can also reduce it at no extra cost. To claim this option, you should choose a loan with flexible repayment and exclude offers that are static in their framework and require additional costs for changes in the rate.
For example, if you started with high rates at the time of borrowing and become unemployed within the term, a flexible offer may be worthwhile and allow you, the borrower, to adjust to current financial capabilities.
Pay off loans faster – opportunities through free unscheduled repayment
A good option for shortening the loan term are unscheduled repayments. Be sure to include the cost of an unscheduled repayment in the comparison. Only if you can pay more once a year free of charge, for example, an unscheduled repayment is really recommended.
If the unscheduled repayment involves additional costs, you will shorten the loan term but increase the interest rate and ultimately have to accept disadvantages. There are many flexible offers, in which a loan with free unscheduled repayment and thus the chance of a faster termination of the liability can be used.
For example, if you are looking for a debt restructuring for a current car loan, you are certainly interested in an offer that you can pay off faster than your current loan. To further accelerate the loan term, unscheduled repayments are also a good option here.
The influence of the term on the interest rates
As already mentioned, the term and the interest rate of a loan are significantly dependent on each other. The faster you pay off the liability, the more favorably you can finance it. Conversely, if you have a loan with a long repayment period, you need to be aware that the interest rate and therefore the total debt will increase.
In addition to the credit period, your personal interest offer is of course also influenced by other factors, of which the creditworthiness takes the largest position. A reputable loan broker will recommend you a loan that suits you in all respects and is tailored to your possibilities and your claim in terms of repayment.
It is taken to heart that you have enough money at your free disposal every month and thus do not get into a financial bottleneck or are unable to repay the loan installment on time.
Car loan – rescheduling to an offer with a shorter credit period?
In the case of real estate financing and car loans, it is particularly worthwhile to look at the term of the loan. If you think about debt restructuring, you can pay off your car or house faster and benefit from the advantage of shortening the loan term.
In order to obtain even more flexibility, the debt restructuring should allow for free unscheduled repayments or a one-time increase, but also a reduction of the installments. As soon as you have to pay for related services or accept an increase in interest rates, keep looking and use the comparison to find an offer that meets your requirements.
The rescheduling of the car loan to a favorable installment loan or a loan for free disposal belongs to the most frequent searches, if it concerns a possibility for the shortening of the credit term. If you do not want to search yourself, you can look around on the free financial market and entrust a qualified service provider with your request.
Keeping an eye on your finances – correctly calculating the cost of living in euros per month
Since this is an important point to consider when considering the loan term, we would like to break down the cost of living once again and make you aware that you should not only focus on the fixed costs.
In addition to the rent, your electricity bill and the telephone, there are many small items that may not come to your immediate attention when you fill out the self-disclosure form. When it comes to calculating the finances available for repayment, you should calculate all the money, including your monthly reserves, special expenses and the cost of food, restaurant visits or train rides and gasoline.
A little cheating can turn into a bigger problem if you end up either having to accept restrictions or not being able to make the repayment as agreed. If you are looking for a loan, pay the utmost attention to the correct calculation of the loan term.
As a borrower, you agree to pay the installments on time and avoid outstanding debts. You will only succeed if the term is adapted to your possibilities according to finances and an unforeseen event does not become a financial fiasco. Not the bank, but you are in control of your money!