- Specify the purpose
Fixed-purpose loans make the interest rate cheaper. This is due to default risk, which the bank can better value. Always specify a fixed use, if possible.
- Note running time
Choose the term carefully! After all, the longer a loan runs, the longer you have to pay interest. With a short maturity, the repayment rate is higher, but you pay less interest.
- Repurposing expensive loans
Have you completed one or more loans at a time when interest rates were even higher? Take advantage of the possibility of rescheduling and get cheaper rates. Note, however, the cost of a prepayment penalty.
- compare offers
Do not accept the first loan offer for your house bank, but compare absolutely different offers. For this, you can use the free and non-binding loan calculator from FinanceScout24.
Larger purchases such as a car or even a property cannot be financed out of pocket for most people. For such – and many other – cases, the banks are lending. But how do you find the cheapest loans – and how do you recognize a cheap loan?
When is a loan cheap?
To know when a loan is really cheap, you first need to know what factors are important for a loan- testament of youth. Which includes:
- Lending rates (interest rate)
- running time
- In some circumstances: fixed interest period
The interest rate is certainly one of the most important factors because it determines how much the credit costs you in the year. Incidentally, the decisive factor here is the effective interest rate (sometimes called the effective annual interest rate) and not the nominal or borrowing rate. The effective interest rate takes into account all the cost factors of the loan, such as a delayed repayment start. With the help of the effective interest rate offers can be compared well as it reflects the actual annual cost of the loan. Also very important is the duration, the period over which you repay the loan.
Since most loan offers are installment loans, the monthly installment – together with the payout amount and the interest rate – results from the term. Since this is a calculated quantity that depends on several factors, the monthly rate is not listed in the list above. The monthly rate, however, is an extremely important factor as it indicates the effective monthly burden.
The purpose for the loan is also important for the costs. If you opt for regular consumer credit without earmarking, the bank will charge you higher interest rates than, say, a construction loan. The reason for this is that, for a given purpose, the bank is better able to assess the risk of default and therefore classifies it as lower overall.
Collateral for loans is usually required only for very high loan amounts – the more important here is that you do not overestimate yourself financially. If at some point you are no longer able to pay the loan installments, the bank will make use of the collateral to settle the remaining debt. Since these are usually safe investments or real estate, the loss usually hits borrowers twice as hard.
The fixed interest period usually only plays a role if you are looking for cheap loans for home buying or building. Here, the terms are so long that the banks are not willing to fix the interest rate over the entire term. Instead, it will be agreed for a period of time, after which you will renegotiate part of the credit terms as part of the follow-up financing.
So when is a loan cheap? In general, of course, it can be said that the interest rate should not exceed the general interest rate level for loans – after all, the valuation of a loan is always very individual. In addition, the conditions in the various areas are very different – for example, the interest rates on construction loans are usually lower than those for consumer loans. A general statement about when a loan is cheap, can therefore hardly do.
Overall, however, interest rates on loans have been steadily downward over the past 15 years, with some exceptions, so loans are currently extremely cheap.
So you get even cheaper loans
For cheap loans, a comparison of the offers is essential, for example, with the help of the FinanceScout24 loan calculator, because only then can you find the loan offer that fits best on all terms to their own ideas. Here, the purpose of use plays a major role, because the conditions for a cheap used car financing look very different than those for a cheap real estate loan.
Of course, your personal situation is also very important, especially your regular income. Among other things, the bank measures – among other things – your financial capacity by which it decides whether and on what terms it makes you a loan offer.
In addition, there are several ways to influence the loan conditions in your favor:
- Offer collateral
Providing the bank with collateral (such as endowment life insurance or the registration of a land charge on a condominium), even if it does not require it, has a positive effect on the terms of the contract and thus on the total cost of the loan. Especially with smaller consumer loans, where the repayment is usually hardly endangered due to the short term, this variant is appropriate.
- Find the second borrower
Another way to reduce the cost of credit is to designate a second borrower. He is jointly liable with you for the repayment of the loan amount, and he usually has his own income, so that the Bank estimates the risk of default significantly lower. However, to avoid potential problems, you should only choose these variants if the second borrower also benefits from the loan – such as the spouse or a business partner.
- Searching for guarantors
A modification of the loan partner is the guarantor – here you name a person who has to take over the repayment of the loan if you as a borrower are no longer able to do so. Since the guarantor carries the full risk without having any benefit from the loan, this option is only recommended in exceptional cases – because even the best intentions do not protect against unemployment or even disability.
- Arrange for special repayments
In addition to the above options, there is still a fairly simple way to reduce the cost of borrowing: special repayments. If, for example, you agree to free special repayments of up to ten percent of the loan amount when signing the contract, you can repay the corresponding amount each year without the bank being required to demand a prepayment penalty. So if you have some money left over (or expect to spend more during the term), you can shorten the loan’s term and save on interest costs.
Cheap loans for civil servants
Since civil servants are hardly terminable and therefore have a very secure income, they usually receive particularly favorable terms on the official loan from banks. In addition, the providers are often willing to pay even higher loan amounts without collateral.
- Popular types of credit
- 10000 Euro credit
- financial calculator
- Credit for pensioners
- Credit for trainees
- Moving credit
- holiday Credits
- Further credit types
Tips to cut costs
When concluding a loan agreement, credit default insurance – also called residual debt insurance – is often offered. This takes over the repayment of the loan, should the borrower without own fault no longer be able to take over the monthly installments. This is the case, for example, when the borrower becomes disabled through an accident, is terminated without notice or dies.
However, since such an insurance is associated with quite high costs, it should usually be completed only with high loan amounts and long maturities, such as real estate financing.
The right duration
Basically, the longer a loan runs, the longer you pay interest. Therefore, a long-term loan with the same loan amount is always more expensive than a short-term loan. For this reason, you should always choose the shortest possible term – but also pay attention to the monthly rate. If you choose the runtime too short, you may not be able to afford the monthly installment anymore.
Remortgage: Benefit from the interest rate development
If you have a loan at a time when the interest rate level was very high, you can benefit from a debt rescheduling when interest rates fall. In this case, you terminate the loan agreement and take out a new loan from another bank (or even the lending bank) in the amount of the remaining debt, which you use to pay off the old loan. Although the bank requires a prepayment penalty in this case, this option can nevertheless pay off if the interest rate level falls accordingly, in particular, since the compensation for installment loans is limited to one percent of the remaining debt.
The savings are best illustrated by an example. The following conditions are used:
- Loan amount: 15,000 euros
- The nominal interest rate at closing: 4 percent
- Duration: 6 years
- Special repayments: Up to 10 percent free
After two years, a residual debt of 10,393.60 euros remains. If interest rates have fallen to two percent in the meantime, the following two options now exist:
||Repayment of the original loan
|Debt after two years loan term
|Cost of debt restructuring
|Interest payments for residual maturity
|Total costs for remaining term
In this example, they would save over the debt restructuring so over 300 euros in interest costs, also the monthly rate would be slightly lower. By the way: As part of a rescheduling, several loans can be combined into a new loan.
Find a cheap car financing
When car loan there are some special considerations. First of all, it is a purpose-specific loan, so the amount paid out must actually be used to buy or repair a vehicle. In addition, most banks require the vehicle to serve as collateral for the loan, so the second part of the registration certificate often remains with the bank. Occasionally, even the bank is entered as the owner of the car until full payment of the loan. However, these conditions also mean that car loans are generally relatively cheap.
The car brand or the car type – for example, with an RV financing – has an only indirect influence on the conditions: The house banks of some manufacturers sometimes offer very favorable conditions for financing, some even require neither a down payment nor interest. Of course, such offers cannot be matched by ordinary commercial banks. The reasons for the sometimes extreme differences in terms and conditions are manifold. For example, the profit margins for new vehicles are so great that manufacturers can at least cover their costs even if their credit conditions are unfavorable – commercial banks do not have this advantage. In addition, the manufacturers are trying to keep customers loyal to their brand over the long term. In addition, every vehicle sold acts as an advertisement for the brand.
Basically, the same applies to car loans, as with any other loan: the faster it is paid off, the lower the cost. In this respect, you should always strive to replace the loan as soon as possible. Incidentally, this also applies to zero-percent financing, in which no interest payments are incurred. Because if the car is destroyed by an accident, you still have to pay the monthly installments and buy a new vehicle, which means a significant financial burden.
Whether with the repayment free special repayments are possible, varies from contract to contract. As a rule, however, such repayment possibilities can be agreed before the contract is concluded. If the bank excludes free special repayments, however, it may still be worthwhile repaying the loan with a larger sum in full – you should compare the penalties to the pending interest payments.