A long-term loan can be required in a variety of cases. Long maturities are particularly likely when large amounts of credit have been applied for and repayments are made in order to keep individual installments at an affordable level. In most cases, this is real estate financing, which can often take several decades to fully repay. But also normal installment or car loans can have very long terms, which in the individual case always depends on the agreed repayment modalities.
Characteristics of long-term loans
Anyone who applies for a long-term loan attaches importance to being burdened monthly with the lowest possible installment payments. Even loans that are not used for real estate or car financing can be designed so that only small monthly interest and principal payments are incurred. But it is also a question of what one is willing to spend on a loan. Because one thing is for sure: the longer the period that one would like to estimate for the repayment, the more expensive the credit will ultimately be. A point that should be taken into account in your own calculation.
Anyone who chooses a long-term loan should also be aware that he will have a negative credit bureau entry for the entire duration. So, if another loan is needed during the term, possibly even more urgent, this can prove extremely negative. Because each bank checks before the lending, whether an entry in the credit bureau exists and therefore also evaluates the creditworthiness of the customer. Only when one’s own income is high enough to service two capital services will a second loan be granted.
Before concluding a long-term loan, it is particularly important to look closely at the terms of the offers. After all, the borrower is bound by the terms and conditions described there for several years from the time the contract is concluded. The most important comparison feature here too is the effective interest rate. This interest rate includes all other costs that affect the loan as such. This concerns, for example, the processing fees.
The interest rate is enormously important, but ultimately only an evaluation criterion. Those who want to stay as flexible as possible over the years should also take a look at the repayment terms. Are premature repayments possible and if so, at what price? Can the loan possibly be replaced prematurely? Many banks require a prepayment penalty for such a project and especially for a long-term loan. The reason for this is the lost interest income with which the bank has calculated.
What is a residual debt insurance and when does it make sense?
Especially with a long-term loan, the conclusion of a residual debt insurance can be particularly useful. Because this takes over the installment or even the entire replacement of the loan, if the borrower severe fatalities such as unemployment, disability or death overtake. In the latter case, the claimant’s family is protected from claims, which is especially important if the claimant is also the sole breadwinner.
Residual insurances work in principle like term life insurance, with the difference that in the former, the contributions continue to decline. This is because the insurance premiums are always adjusted to the remaining balance. However, one should be aware of the cost of a residual debt insurance before concluding a long-term loan, as this represents an additional monthly burden that also seeks to be funded and is usually not factored into the effective interest rate.