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Loan Term: How Long Should a Loan Run?

The loan term describes the phase during which a loan is repaid. There are different factors that determine the loan term. Borrowers need to be aware that by determining the term of a loan, they mutually influence the conditions that a lender grants them.

Why is the loan term important at all?

Why is the loan term important at all?

In addition to interest, the term affects how expensive a loan becomes. Basically:

  • The shorter the term, the lower the annual percentage rate.
  • The longer the term is chosen, the higher the annual percentage rate.

Note: As a rule, there is a certain “term corridor” for installment loans, in which the interest does not vary even with small changes in the term. With regard to the annual interest rate, it is irrelevant whether the loan will be paid off in 24, 36 or 48 months. Most credit institutions only charge premiums for very long terms of over 60 months .

In addition, the term also has an impact on the absolute borrowing costs. It also applies here that long-term loans are more expensive than loans that are paid off quickly. But: short terms always decrease – with the same loan amount – with comparatively high repayment rates. In the best case, borrowers must choose the term as follows:

  • As short as possible to reduce the annual interest rate and the total borrowing costs.
  • Sufficiently long so that the repayment rate does not put too much pressure on the monthly household budget.

How can the suitable loan term be determined?

How can the suitable loan term be determined?

It is advisable to determine the length of the loan term based on the ideal amount of the monthly repayment rate. Ultimately, a borrower’s financial framework dictates how much money he can spend each month to repay a loan. For this reason, consumers must first compare income and expenditure in order to determine their financial scope – in technical jargon this is called “budgetary bill”.

Note: Banks are also requesting the cost of living as part of the credit talks. Consumers should absolutely provide truthful information here, because if they provide false information on the basis of which a loan is granted, this can ultimately have legal consequences.

Once consumers have determined the amount that could be available each month to repay a loan, you should plan a safety buffer. It is good practice not to plan the entire monthly budget firmly, because there are always unforeseen expenses. If consumers have reserved every penny permanently, a financial imbalance quickly arises, which sometimes even leads to a debt trap.

Example: A borrower has a net household income of 2,000 USD. The monthly cost of living including all financial obligations is 1,600 USD. Accordingly, 400 USD are not planned. As a precaution, consumers of the 400 USD should plan no more than 200 to 250 USD for the repayment of a loan in the long term. This leaves a buffer of 150 to 200 USD for unforeseen or spontaneous expenses.

How much credit can borrowers afford?

How much credit can borrowers afford?

How much credit a borrower can afford if the monthly available budget is known is determined or varied by the term. It is advisable not to choose the loan term beyond the useful life of the purchased goods. For example, if you plan to finance a car with a loan and drive this car for the next six years, the loan term should not be longer than six years.

Example: If, as in the example above, the borrower has 200 USD available to repay a loan per month, he could afford a loan of almost 16,000 USD with a term of 84 months and an effective interest rate of 1.87%.

How do I calculate the optimal loan term?

How do I calculate the optimal loan term?

Calculating the length of the term yourself is not that easy, because there are different types of credit. For example, if an annuity loan is taken out, the term is calculated differently than if a final loan is chosen.

In the best case, borrowers must choose the term as follows:

  • As short as possible to reduce the annual interest rate and the total borrowing costs.
  • Sufficiently long so that the repayment rate does not put too much pressure on the monthly household budget.

The loan term can be determined step by step using the best bank loan calculator by entering a loan amount and selecting any term. A column then appears in the results list, in which the monthly charge can be read. Consumers can now use the various options to try out how the monthly rate changes. In this way, they approach the ideal runtime that suits their individual circumstances.

Is it possible to extend the loan term?

Is it possible to extend the loan term?

The loan term is an important variable when agreeing a loan. It determines how high the total interest the bank will take on the loan. It is therefore not easily possible to extend an agreed loan term. There is no legal entitlement to an extension of the loan term. Borrowers must contact the bank and ask. If the bank agrees to an extension, it does so out of goodwill.

Tip: When agreeing your loan, consumers should always make sure that they include a special agreement that can affect the loan term. One option would be to adjust the rate down. This entails an extension of the loan term.

If you want to extend the loan term, you should be aware that the bank will benefit from it. The longer a loan runs, the longer it takes interest and receives more interest overall for the same loan amount. When talking to their bank about extending the loan term, borrowers should ask for a list of the additional costs. This way you know exactly how much more you have to pay compared to the original loan agreement.

Tips on how consumers can extend a loan term:

If the loan was concluded with a nearby bank, the personal consultation with the bank advisor is due. Consumers should always explain why they want to extend the term (e.g. financial burden due to relocation, changing jobs or the next generation) and how high the future monthly rate should be. It is best to ask borrowers how they can shorten the processing time. Maybe there are documents that the bank advisor would like to see? Consumers should clarify this before the appointment so that they can bring these documents directly with them.

Debt and new loan agreement

If it is not possible to agree on an extension of the term with the lender, it may be worth thinking about rescheduling. With a new contract, consumers can re-agree the conditions and ensure that the rate is correspondingly lower and additional special agreements such as special repayment right, repayment suspension and rate adjustment (up and down) are granted. A lot of money can be saved at this point because interest rates have dropped considerably in recent years. Many borrowers can save a few hundred USD here.Tip: The loan comparison of best bank is used to compare offers for debt restructuring. A personal interview with an experienced financial advisor from best bank helps to point out the options and answer any questions that arise.

Advantages and disadvantages of long and short loan terms

Advantages and disadvantages of long and short loan terms

Long loan term – advantages and disadvantages

A loan of 10,000 USD with a term of 60 months, an interest rate of 2.2 percent and a repayment rate of 176.15 USD costs a total of 569.24 USD in interest. If 2.2 percent of the loan is repaid over 36 months at USD 287 each, a total of USD 342.79 interest accrues. The saving is 226.45 USD, which corresponds to a reduction of 39.78 percent.

What else should borrowers consider when agreeing the loan term?

What else should borrowers consider when agreeing the loan term?

Borrowers should consider which loan term is best suited to their needs, given the monthly charge and the interest rate granted. First and foremost, it’s about not restricting your own financial scope too much. Banks are also entitled to credit terms. For example, you look at the age of an applicant. If a pensioner applies for a loan, he will receive an offer with a much shorter term than a young worker who takes up his first job. Tip: Borrowers should always keep an eye on their personal financial situation and agree on customer-friendly special conditions. Flexible repayment modalities, repayment suspension and repayment rate changes are such special conditions that can maintain or improve the ability to act in a financial emergency – even with an otherwise fixed contract term.

Find the maximum rate, compare offers and check special conditions

Find the maximum rate, compare offers and check special conditions

The choice of the loan term has a direct influence on the loan costs, but also the monthly charge. For this reason, prospective creditors can use the best bank loan calculator to provide a selection of loan offers including the interest rate and monthly installment with just a few details. Different terms can be conveniently set here, so that it is immediately apparent how the change in term affects the credit rate. Borrowers can also get free advice and support from an independent financial professional. In this way it is possible to determine the appropriate loan term and to find a loan with terms that make the most sense for your own purposes.

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