Anyone planning a major purchase often finances it with a loan. Since you have to pay back this borrowed money, it is crucial that the rates of repayment also fit into your own budget. We show you how to find the perfect amortization rate for you, and what to look out for.
What is a redemption rate?
Repayment rate is the amount that must be repaid to the lender on a regular basis. Basically, there are three different types of eradication that can be distinguished:
- Repayment of installments
Contrary to popular belief, most loans ,which consumers pay back, are not installment repayments. This term refers to a repayment that decreases in amount over the life of the loan. This happens because with each installment paid, the remaining debt also decreases. This also decreases the amount of interest payable.
- The bullet repayment
Bullet repayment is more likely to be found in the business sector with corporate loans. Partly, however, also with car financing as part of the so-called 3-way financing. It is characterized by not repaying the loan amount or paying interest during the term of the loan. Only at the end of the term, the loan together with the entire interest amount must be repaid to the lender in one sum.
- The annuity repayment
With annuity repayment, the amount of repayment to be made remains constant throughout the term of the loan. The borrower always transfers the same amount to the lender at regular intervals, mostly monthly. As interest charges decrease over time due to diminishing remaining debt, each installment automatically increases the amount repaid. Overall, however, the amount to be paid remains the same.
Annuity repayment is the most common repayment method for consumer loans. It is important that the amount of the repayment rate is adapted to the personal budget. The details of repaying an installment loan can be seen in the associated repayment schedule.
What is the significance of the repayment rate?
Taking out a loan for a major purchase, such as buying a home or a new car, means making a long-term commitment for the borrower. In most cases, repayment of borrowed financing stretches over several years, and often decades in the case of real estate. Thus, the repayment rate determines whether you can afford an online loan with your available income. It should always be kept in mind that the repayment in the form of the redemption rate must be guaranteed over the entire term of the loan.
Basically, the amount of the repayment rate is influenced by three important factors:
- The amount of the loan
- The term of the loan
- The amount of the agreed interest rate.
How is the repayment rate made up?
The repayment installment, which must be paid back to the lender, usually monthly, is made up of two components:
With an annuity loan, that is, a loan with a constant repayment rate, the ratio of interest to repayment shifts over time. An example explains this most clearly:
Peter H. takes a loan in the amount of 5.€ 000 to buy a new facility for themselves. The agreed interest rate is 3.00. The monthly payment is €250. So in the first month, Peter's repayment rate breaks down as follows:
(Remaining debt x interest rate) : 12 months = interest portion
(5.000 € x 3.00 %) : 12 months = € 12.50
Total installment – interest portion = repayment portion
250 € – 12,50 € = 237,50 €
So in the first month, Peter has already paid €237.50 of the borrowed 5.000 € paid off. So its remaining debt is only 4.762,50 €. So, in the second month, Peter's repayment rate is composed as follows:
(4.762.50 x 3.00 %) : 12 months = €11.91 interest rate component
250 € – 11.91 € = 238.09 € redemption share
So Peter can already pay off a slightly higher amount in the second month than he could in the first month. However, since the rate remains unchanged in its amount, Peter basically notices nothing of this shift.
What is the repayment plan?
Those who take out a loan will also find a repayment schedule in the documents accompanying it. This indicates the repayment installments to be paid and their due dates. It also shows how the ratio of interest to principal changes over the life of the loan. The borrower therefore has an overview from the beginning of how the repayment of the loan will develop.
How to find the perfect amount of my amortization rate?
Taking out a loan always means making a big commitment. Finally, the amount borrowed and the interest due on it must also be repaid. Therefore, you must be sure that the monthly repayment rate also fits into your own budget. This means that the payment of the repayment installment can always be guaranteed in addition to all other monthly expenses for rent, electricity, food and the like. The budget available for the repayment is the difference between your regular income (e.g. salary) and the sum of your expenses.
It should be noted that there is always a financial buffer in your own budget to be able to cope with unforeseen expenses. An example illustrates this:
Our Peter receives a net salary of 2 each month.800 € transferred to his account. Its regular expenses for housing, food, car, etc. amount 1.600 €. If you compare these two sums, theoretically a monthly loan installment would be 1.200 € Euro presentable. However, if Peter were to take out a loan with such a monthly rate, he would have no financial buffer for unforeseen expenses. A broken washing machine or necessary car repairs would present him with real financial problems. A spontaneous vacation would also be out of the question. So it makes more sense to set the maximum possible monthly installment lower. Well conceivable would be a rate around the 600 – 800 € monthly.
If you default on one or more installments, the bank is entitled to cancel the loan and immediately collect the outstanding balance. If this cannot be paid then, unpleasant collection procedures stand in the house.
Which banks offer an installment break on Kreditexperte?
In the meantime, numerous banks have recognized the need for an installment break for themselves and their customers and also offer it with numerous loans. Thus, borrowers can also suspend a loan installment once without the bank directly threatening to terminate the loan agreement. In our loan comparison, these are some of the banks that offer an installment break:
- Sberbank Direct
- Creditplus Bank
- Ikano Bank
- DSL Bank
- Evenord Bank
Bottom line on proper repayment rates
The repayment rate is decisive for whether one can afford a loan or not. After all, it represents an additional monthly burden and must be able to be guaranteed over the entire term. It always makes sense not to max out your personal budget to be financially prepared for unforeseen events. If one falls behind with the installment payment for a loan, additional costs for collection procedures and possibly also negative entries with the Schufa can be the consequence.