The repayment of a loan is made in monthly installments, the amount of which is composed of the loan amount, the term and the interest. Low monthly installments can be achieved both by extending the loan term and by reducing the loan amount. The decision to buy inexpensively can help to reduce credit requirements, as can the cancellation of existing credit. The latter makes sense for pure savings, but not for assets intended for retirement benefits.
A long loan term leads to low monthly installments
The easiest way to obtain a loan with low installments is to choose the longest possible term. Financial institutions set limits on this form of rate reduction by limiting the possible loan term to predominantly seven years. Some banks extend the possible repayment period of an installment loan to ten years, but often require a higher amount than the minimum loan amount. Longer terms than ten years are reserved for private borrowers for real estate financing.
The fact that two factors make a loan with a low rate and a long term more expensive makes it easier for credit customers who prefer low monthly rates. The annual percentage rate of interest accrues every year for the part of the loan amount that has not yet been repaid, so that the overall burden inevitably increases with longer terms. In addition, credit institutions mostly charge higher interest rates for installment loans with long terms than for loans to be repaid within a few years. The interest premium is justified because the statistical default risk increases with the term of the loan. In addition, the bank cannot reliably assess the terms of credit refinancing in the long term, so that it calculates with increasing refinancing costs.
Low monthly rates often allow borrowing
Low monthly loan offers customers with low rates the chance to successfully apply for a loan. As part of the budgetary calculation, the credit institution checks whether the applicant can pay the agreed monthly rate from his disposable income. The amount of total income is less important than the monthly burden of the loan. This is lower for a loan with low installments than for a loan with high loan installments and a correspondingly quick repayment.
The renewed submission of an initially rejected loan application with a longer term and correspondingly low credit rates often leads to application approval. Many banks inform their applicants on their own that the refusal of the loan request was due to the fact that the monthly installments are too high compared to earned income, so that the loan seeker can improve the application with regard to the desired term. Borrowers can avoid this step by critically examining their possible monthly credit burden themselves and choosing a sufficiently long term, including the associated low monthly installments.