Loan term | How short should it be?
For most banks, the interest on a loan is based not only on the creditworthiness of the borrower, but also on the term of the loan. The longer the repayment takes, the more expensive the loan becomes. So the simple formula.
For this reason, it is important for every borrower to choose the shortest possible terms in order not to make the loan unnecessarily expensive. We have summarized here how you can determine the appropriate term for loans and what you should definitely consider when determining the term.
Why are interest rates rising?
When lending, banks and savings banks always strive to keep the default risk associated with a loan as low as possible. If the borrower can no longer pay the installments, the bank will not get their money back and will lose the loan agreement.
The default risk increases with each month that the borrower takes longer to repay the loan. Because nobody can predict exactly whether the conditions of the borrower, i.e. the creditworthiness, deteriorate during the repayment or whether it remains stable. The job can be lost or a serious illness can lead to complete inability to work. There may also be other financial problems that no one can predict and that will suddenly make the monthly loan rate unmanageable.
Therefore, banks are always interested in their customers choosing loans that have a short term. With a small loan, you are always a better customer for the bank than with a large real estate loan. Even if this brings in significantly more interest due to the longer term.
How short should the loan term be?
In most cases, the term of a loan can be determined individually by the borrower. So you have a say in how long you want to pay your debt to the bank. How long or short this period is depends on your solvency. If there is still a lot of money left over from your income after all expenses have been deducted, you can afford a larger loan rate and repay the loan in a shorter amount of time than with a somewhat narrower budget statement. It is therefore important to calculate and calculate in advance in order to find the best solution.
Tip: If you only choose a very short term because your credit rating is not optimal and the interest rates are therefore already high, then you should rather add a co-applicant than to set the term too short. A good co-applicant will improve your credit rating and lower the interest rate. An experiment with the runtime is then no longer necessary.
A comparison helps
Since the term of a loan can vary considerably and since various factors can have a positive or negative effect on the term of the loan, we recommend that you make a detailed comparison of various offers before taking out the loan. With the help of the comparison, you can not only check which creditworthiness or solvency you bring with you. You can also check how the term of a loan affects the cost of the loan and what options you have with your requirements for borrowing.
Always keep in mind that a loan should only be taken out if you can really afford it. Do not take too much risk and plan so that there is still enough air for other projects. Otherwise, the credit quickly becomes a burden and the joy in the things that have been put into practice has vanished quite quickly.