A repayment loan is a special form of financing. With this loan, repayment installments of the same amount are paid over the entire term. The loan is well suited for all people who value planning. The term of the loan is much shorter than, for example, an annuity loan.
This creates some benefit for the borrower. In the course of and through the permanent repayment, the interest rate decreases in relation to the annual amount of the repayment amount.
Such loans are particularly useful for real estate and mortgage lending. Over the entire term, the installment fees are getting smaller. For this reason, pay-off loans are very popular.
Advantages and disadvantages of the payment loan
A big advantage is that the interest rates on a repayment loan are often very favorable. Every user can enjoy a constant repayment installment. This makes the monthly budget planning easier and the residual debt is reduced very quickly.
This has the advantage that the interest payments continue to decrease. Especially with a long-term real estate loan, this form of loan has been proven for years. By contrast, the initial burden is somewhat high due to the higher repayment rates.
As a result, the monthly rate only decreases constantly over a certain period of time. As a result, every user needs to spend a little more money earning their first monthly installments.
Why is the loan so useful for mortgage lending?
For mortgage lending, the advantage lies in the fact that the user pays his bank a monthly repayment installment and the interest due on it. Each repayment rate reduces the residual debt and also reduces interest rates.
As a result, monthly installment mortgage rates are becoming smaller and smaller. For this, higher installments must be accepted at the beginning of the term. As a result, this form of loan is particularly well suited for conversions and additions to own real estate.
Particularly well-earning people use this loan for mortgage lending. Before signing the credit agreement, a credit calculation should always be carried out. For the determination of the right loan the personal circumstances as well as the financial condition play an important role.
What condition is required for this loan?
The applicant must have reached the minimum age of 18 years. In many cases, the minimum age for a repayment loan is even raised by banks or banks to provide a higher level of security.
Minors have little chance of such a loan. The residence of the applicant must be in Germany. It is important that this is the main residence. Many banks also require a bank account in Germany. This account will be used as the reference account to which the loan amount will be transferred.
The most important requirement for granting the loan is, of course, the creditworthiness. The creditworthiness of the applicant is checked by a credit bureau query. It calculates the relationship between the applicant’s income and expenditure on all accounts.
If the monthly income is higher than the applicant’s expenses, there is a good chance of a pay-off loan. If other loans have to be serviced already, this chance drops a bit. Often a mortgage loan is accepted as an additional security for the loan. For the mortgage, the name of the applicant must also be found in the land register.
Example calculation for a payment loan
If, for example, a customer pays a loan of 20,000 euros, a term of five years or an interest rate of 10%, services amounting to 1,000 euros and 2,000 euros interest are to be paid in the first year.
Even in the fifth year, the repayment remains at 4,000 euros, but the interest is minimized to 400 euros. For a borrower to more easily decide which form of loan is cheaper, the terms should always be compared exactly. However, it is clear that the loan is much cheaper at the same maturity and interest rate than an annuity loan.
If it is a loan of 1 million euros and the term is two years, the borrower pays at a 3% interest rate loan rates of 30,000 euros and a repayment amount of 500,000 euros in the first year. For the second year, the rate remains at 500,000 euros. Here, however, only interest in the amount of 15,000 euros will be charged.
The examples show that the accrued installment always consists of the linear repayment installment and the interest calculated from the residual debt. As a result, the repayment share always remains the same.
5 tips for a payment loan
1. Compare prices
Before concluding a credit agreement, the prices and terms should be compared exactly. Every loan offers advantages and disadvantages. Special attention should always be paid to the repayment of installments and the amount of interest.
The installments always consist of interest and repayment as well as any fees. The repayment is needed for the repayment of the loan amount.
The costs and commissions incurred in financing the loan are paid by the fees and interest. With a good credit, the installments should always be calculable and the monthly burden low.
2. Use maturing or maturing loans
In the case of a so-called bullet loan, the interest is always paid by a one-off payment. During the repayment phase, only the interest will be repaid. The redemption portion is saved as part of the repayment vehicle as a life insurance policy.
This is done through funds or a savings plan. If enough money has been saved, it can be used to pay off the loan. A big advantage of this loan is that the contributions can often be saved for tax purposes.
A minor disadvantage is that the interest burden always remains unchanged during the loan term. This is mainly because it does not minimize the residual debt.
3. Loan with a constant repayment
Loans with a constant repayment offer a constant repayment rate during the repayment phase. This has the advantage that the interest is calculated only for the remaining debt and thus the monthly burden is less and less. The residual debt is reduced and the monthly rate sink.
The repayment share remains the same. Accordingly, at the beginning the monthly burden is very high. In finance, this variant of the repayment next to the real estate financing is the norm. Often, banks and borrowers often resort to annuity loans on real estate.
For rented buildings, maturity loans are an option. Banks seldom offer such loans in the private sector.
4. Find the right bank
Before concluding the loan, it is important to find the right bank for the loan. If the repayment loans are burdened with an entrepreneurial profit, the borrower is much better off with an annuity loan. In any case, it is important that the loan fits the borrower.
After all, not every borrower is able to pay higher installments in the first year. Especially in the construction phase, many real estate financiers calculate with moderate installments per month. After all, unforeseen expenses can occur time and again, especially during the construction phase.
5. Special repayments should be possible
A special advantage are loans that do not exclude a special payment. If a variable interest rate has been agreed between the bank and the borrower for a loan, special repayments are available at any time.
If a fixed interest rate has been fixed in the contract, it is only possible to make a special payment if they are specified in the contract. Otherwise, there are fees for a special repayment, which make a complete repayment of the loan at once not worthwhile. If a loan agreement is terminated prematurely, the borrower often has to expect a prepayment penalty. The fee amount is determined by law.
A classic repayment loan can be terminated in the rules after a ten-year term at no additional cost.