In an installment loan, the borrower repays the loan amount provided by the lender in the form of installments (installments) (see also Loan). These partial amounts usually consist of the repayment portion and the loan interest. With the redemption portion of the borrowed money is paid off, while the interest is to qualify as consideration for the lending. As a result of the ongoing repayment, the outstanding loan amount is reduced as the term of the loan matures.
In the case of an installment loan, constant loan installments are usually agreed for the entire repayment period, which are to be paid on a monthly basis. These equal installments (annuities) include not only the repayment share but also the interest. For this annuity repayment, the total annual exposure for the borrower remains the same throughout the term. Alternatively, there are repayment modalities in which only the repayment rate remains constant, but the current payments decline. The decreasing overall burden results from the continuously falling interest payments, which result from the reduced residual debt. Amortization and interest payments are therefore paid separately.
What and how can be financed by installment loan?
With a installment loan, purchases worth approximately € 1,000 to € 120,000 can be financed, whereby these limits vary depending on the provider. Compared to the credit line, it represents the cheaper option because the interest rates are lower. In case of permanent financial bottlenecks, which entail a recurrent overdraft of the credit line on the current account, installment credit is therefore preferable. Its term is within a time frame of one to a maximum of ten years. The amount of the interest rate depends on the creditworthiness of the borrower.
Private borrowers must demonstrate a secured income from permanent employment to receive an installment loan. Prerequisite for the lending is the economic ability to settle the current installments. Credit institutions can demand the assignment of the attachable portion of income as a hedge against default risk. The co-application by spouse or partner as well as the guarantee by a third person are also customary.
In addition, the conclusion of a residual debt insurance (RSV) may be provided, which is to secure the installment loan in case of illness, unemployment or death of the borrower. This residual debt insurance is associated with additional costs. Other collateral remains the exception for installment loans.
Who can get installment loan?
Depending on whether the installment loan is granted to a private person for the acquisition of consumer goods or a self-employed person to finance business investments, it is a consumer credit or a productive loan. Consumers are entitled to a statutory right of withdrawal, after which they can revoke the installment loan within two weeks of signing the contract. In addition, installment loans from consumers are subject to additional formal requirements such as the written form and the mandatory indication of the effective interest rate.
Installment credits can be taken for various uses. Since it is usually a purpose-free debt financing form, the borrower can freely dispose of the loan amount paid out. The reasons for borrowing range from the purchase of a vehicle over the renovation of a home to financing an education or a trip. These uses are not mandatory part of the loan agreement.
However, banks often offer earmarked installment loans at more favorable terms. In this case, they are specifically taken out as car loans, home loans or debt rescheduling, which allows the borrower to use the loan only appropriately, but in return benefit from lower interest rates. Installment credits are also advertised with the terms small loan, online loan and instant loan.
Installment loans vary in terms of the terms and conditions between the individual providers. They are usually offered in the form of standardized offers. The lenders are both banks with branch network and direct banks in question. In addition, credit agencies make their services available. For the borrower, a comparison of the various loan offers seems worthwhile.