Loan Term – How To Determine The Term For Your Loan!

When deciding on a loan, the loan term is one of the most important factors you need to consider. Many do not worry about it and later have problems with the repayment. The following article deals with the question of which loan term is optimal for you and how you can determine it.


Why is determining the loan term so important?

loan term

By determining the loan term, you decide how much money you will spend on the loan per month over the next few years. If the term is too short, the monthly installments rise sharply. This puts a heavy strain on your budget and may lead to severe restrictions in your lifestyle. However, the loan should not run too long either, as this makes the loan more expensive. Building finance is an exception, since the loan amount is usually relatively high and it is not uncommon to conclude it over a term of 30 years. When taking out the loan, you always have to think long-term. The loan term is often 5 years or more. If you calculate too little, your household budget may experience low tide in the next few years.


Why do longer terms incur higher costs?

loan terms incur higher costs?

When taking out a loan, you pay interest for the entire term of the loan. If the loan runs for five years, the interest is less than for a ten-year term. Overall, the bank gets more money from you.

Another reason is the interest rate. A longer-term loan is usually higher. With a ten-year loan, the bank takes a higher risk. During this long period of time, the risk of a credit default due to death or unemployment increases. If, on the other hand, the loan only runs for five years, the risk is there, but less. The higher interest rate is intended to limit the financial damage.

“The longer the loan term, the more expensive the loan becomes.”


How to determine the appropriate term for loans

How to determine the appropriate term for loans

You can determine the optimal loan term using a household book. You need to know how much money you are spending each month and whether you have any leeway for a loan at all. If your account is permanently overdrawn and falls into the overdraft facility, you should make this list particularly conscientious. Incidentally, many credit institutions also require a self-assessment of their expenses.

  • List all expenses in your household
  • Make a list of all income (work, extra income, rental income, pensions)
  • Find the difference between the two sums. Leave a larger buffer for unforeseen expenses
  • Use a loan calculator to test different loan terms.´
  • Increase or decrease the loan term until you determine an appropriate monthly repayment

When it comes to the list of income, think of larger expenses for which you have to put money over the course of the year. This can be a new vehicle or the next family vacation.

You cannot extend the loan term as you like. Real estate loans often run for ten or a maximum of 15 years. Consumer loans generally have a maximum term of seven or eight years. If you notice that you have financial problems despite a long term, you have to reduce the loan amount. Under no circumstances should the monthly rate be too high. It is better to calculate a little lower. Unfortunately, unforeseen incidents happen again and again and then you may run into financial difficulties.


Can you change the loan term at a later date?

loan term at a later date?

If you want to extend the term of a loan, you have two options. You can cancel the loan and conclude a new contract with a longer term. If you are only interested in extending the term of a loan, this procedure is not recommended. Most loans require you to pay a prepayment penalty if you cancel early. This amount is due because the banks expect the money for a long time. Since they invest the money themselves, the bank has an interest loss if it is repaid early. The bank passes this on to its customers. A new contract is only worthwhile if you also receive lower interest, which your previous bank does not want to pay.

In most cases, debt rescheduling is better. In this case, no prepayment penalty is payable if you stay with your old bank. Another advantage is that it usually works without major formalities. Since the bank already values ​​you as a good customer, it often does not provide proof of earnings.

If the interest rate has changed since the contract was concluded, it may be lower or higher. You should take this into account when rescheduling.

Categories: Loans