If a loan has a long term, the interest on the loan usually increases. A very long credit period is always associated with a higher risk for the credit institutions.
A credit comparison is always recommended to consumers with long loan terms.
Loan term – duration of the payment
The loan term includes the period from the loan disbursement to the loan repayment. The duration of the payment depends on both the repayment and the amount of the nominal interest.
Each borrower must be able to assess the choice of a long or short loan term based on their personal life situation and financial means. Not only should the current life situation be assessed, but the future should also be looked at.
Changing life situations, such as the birth of a child, can result in financial restrictions. For this reason, the future life cycle of a loan should always be included in the planning of a loan, especially in the case of long terms.
Loan term affects loan interest
The risk for the banks increases if the borrower chooses a long loan term. At the start of the loan agreement, no credit institution can calculate this risk if the contract runs for several decades. Many events can worsen the borrower’s financial condition, including:
- Family planning
- Change of work
- Death of the main earner in the family
- other necessary loans
- Bankruptcy (if you are self-employed).Then there may be default on payments over the years. The banks mostly compensate for this uncertainty with higher lending rates. However, for many consumers it is not otherwise possible to repay a real estate or construction loan, for example.
However, if it is a small installment loan, it is always worthwhile for consumers to choose a short term. This short loan term almost always leads to more favorable loan terms. A particularly favorable loan rate for loans with a short term is then usually possible.
Term of a loan – loan comparison
The solvency of the borrowers influences the repayment of the loan. A quick repayment is recommended for consumers who have a high monthly repayment amount.
- With a household bill, future borrowers can quickly find out the monthly amount they can pay. To do this, consumers have to compare revenue with expenditure.
The credit institutions also use the income and expenses to check the creditworthiness of the borrowers. Most credit institutions also take a look at the Credit Bureau of future borrowers. The banks use this to calculate a score.
This provides information about a customer’s creditworthiness. The banks can use this value to calculate how reliably current payments will flow. For long loan terms, it is always advisable to use a free loan comparison on the Internet. The cheapest loans for the specified term are listed there.
The annual percentage rate plays an extremely important role in assessing credit conditions. It identifies the highest cost of a loan.