In connection with a loan or a financing belongs the term of the loan repayment, which describes the repayment of the borrowed sum of money. When lending, the borrower (debtor) agrees to pay the debt back in regular installments. The amount also includes the payment of interest due for the loan. In particular, the weighting of interest and repayment often causes confusion.
Prerequisite for borrowing
In order to be able to take out a loan, certain conditions must be met. For this it is necessary that the person has reached the age of 18 in order to be fully competent. If this is not the case, the consent of the parents or the guardian must be present. In addition, the main residence and the bank account must be in Germany. If the loan is requested here in Germany, the respective financial institution assumes that the principal place of residence is in the Federal Republic of Germany, as well as the associated bank account.
In addition, a permanent employment relationship that is no longer in a probationary period must be available for a loan. This significantly reduces the bank’s risk of default. Even a permanent contract of employment is a very good condition for lending. In the case of fixed-term employment, the term of the loan should not run longer than the employment relationship.
Evidence of income
Proof of income is necessary to enable the respective bank to get an accurate picture of the income available. These can be proven by means of receipts or account statements. The higher the monthly income, the higher the desired loan can be.
With a fluctuating monthly salary, the average earnings are calculated using an average, which is then used as a starting point for a loan.
The required salary statements also depend on the sector and employment status. For permanent employees, often two or three monthly statements are sufficient. As a freelancer or self-employed often the economic evaluations of the last two years must be submitted. In addition, balance sheets are often still desired to get a concrete overview of the economic conditions.
Difficulty with loan application
Freelancers and the self-employed are often classified by many financial institutions as a high-risk group, as they are more likely to be in financial difficulties than other professions and unable to repay their loan properly.
Here, for example, guarantees can often help, as the banks can thus fall back on another person in the event of a financial difficulty, which then assumes the additional installment payment.
Before the bank issues a loan commitment, it also checks whether there is a negative private credit entry. Above all, data about an existing gearing ratio and the respective payment behavior are stored here. On the basis of the available information, a so-called Score value is calculated, which evaluates the creditworthiness. This value enables the bank to make an accurate assessment. If this value is negative, in most cases no credit is granted or only with correspondingly very high conditions.
The loan form
The most popular form of a loan is an annuity loan. In this type of loan, the loan taken up is repaid by a monthly installment (including accrued interest). A special form of this is that the agreed rate always remains the same until the end. Thus, this form of payment offers the bank and the borrower very good control and long-term planning.
The installment payment can be accurately calculated in advance and thus adapted to the financial possibilities, so that the debtor still has enough money left to live.
When repaying the loan, the principal factor is the repayment rate. This should be accurately calculated in advance, as financing is often a long-term issue and can quickly change the circumstances in life. With different calculation variants, the optimal variant can be selected at the end. Since the respective interest payment sinks by a progressive amortization, more of the actual loan is paid off.
Agreement of special payments
A very sensible option for a loan repayment is the agreement of special payments or special repayments. Here, the debtor has the option to make another additional payment outside the monthly repayment installments. For such an agreement, there are certain guidelines that are included in the loan agreement. Often, special repayments are possible up to a certain percentage (for example, 5 percent). A special payment in an unlimited amount is not possible.
For a precise calculation of the loan repayment certain cornerstones must be present. In addition to the actual loan amount, this includes the interest amount and the agreed term. If a loan agreement with a fixed interest rate is agreed, it remains the same throughout the entire phase.
On the other hand, if it is a variable interest rate, it can be adjusted up or down according to the market situation. With the help of an amortization schedule drawn up by the bank, the borrower can see exactly how the interest is divided and the amortization portion.
In order to prevent short-term payment difficulties, a pause in payment can also be agreed in the loan agreement. For example, this allows the borrower to pause a monthly installment. In some cases, up to three free monthly installments can be agreed, but this depends on the willingness of the respective bank.
In some cases, however, a higher interest rate is due for this willingness. Nevertheless, it may be worthwhile to make such an agreement. However, this should be recorded in writing in the credit agreement so that there are no discrepancies afterwards.
In some cases, early loan repayment is possible, but most banks often charge a high fee for such action. This is a prepayment penalty. Such an approach is often very useful if a significant cost savings comes from the early loan settlement.
Also, in some cases it may make sense to reschedule the loan if the interest rates in the “old contract” are well above the current level. Here, a detailed comparison must be made in advance, so that the savings in interest rates are well above the costs incurred. In addition to the prepayment penalty, the banks also require a kind of processing fee for the termination of the old contract.
The ability to terminate a loan prematurely is not based on a courtesy decision of the respective bank, but since 2010 has a Europe-wide policy that can be implemented to protect consumers from high interest payments and to give them the option of a more cost-effective debt rescheduling.
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