People who plan to make a major purchase often finance it with a loan. Since you have to pay back the money you have borrowed, it is important that the repayment installments fit into your budget. We show you how to find the perfect repayment rate for you and what to look out for in the process.
What is a repayment rate?
The amortization rate is the amount that must be repaid to the lender on a regular basis. In principle, three different types of repayment can be distinguished:
- The repayment of installments
contrary to popular belief, most loans that consumers repay are not repaid in installments. This term refers to a repayment whose amount keeps decreasing over the term of the loan. This happens because with every installment paid, the remaining debt is also reduced. This also reduces the amount of interest to be paid.
- The bullet repayment
a bullet repayment is more commonly found in the business sector for corporate loans. Partly, however, also in the case of car financing as part of so-called 3-way financing. It is characterized by the fact that during the term of the loan, neither the amount of the loan is repaid nor the interest is paid. Only at the end of the term does the loan have to be repaid to the lender in one sum together with the total interest amount.
- The annuity repayment
with annuity repayment, the amount of the repayment installment to be paid remains constant throughout the entire term. The borrower always transfers the same amount to the lender at regular intervals, usually monthly. Since the interest burden decreases over time due to the decreasing residual debt, the repaid amount increases automatically with each installment. Overall, however, the amount to be paid remains the same.
In the case of consumer loans, the annuity repayment is the most common type of repayment. It is important to adjust the repayment rate to your personal budget. The details of the repayment of an installment loan can be viewed in the associated repayment schedule.
What is the significance of the repayment rate??
Taking out a loan for a major purchase, such as a home or a new car, is a long-term commitment for the borrower. In most cases, the repayment of the financing taken out extends over several years, and in the case of real estate often even over decades. The repayment rate is therefore decisive for whether one can afford an online loan with the available income. It should always be borne in mind that repayment in the form of the redemption installment must be guaranteed over the entire term of the loan.
Basically, the repayment rate is influenced by three important factors:
How is the repayment rate made up??
The repayment installment, which usually has to be paid back to the lender on a monthly basis, is made up of two components:
In the case of an annuity loan, i.E. A loan with a constant repayment rate, the ratio of interest and repayment shifts over time. An example explains this most clearly:
Peter H. Takes a credit in the amount of 5.000 € to buy a new facility for themselves. The agreed interest rate is 3.00. The monthly rate is € 250. In the first month, peter's repayment installment is therefore made up as follows:
(remaining debt x interest rate) : 12 months = interest rate
(5.000 € x 3.00 %) : 12 months = 12.50 €
Total installment – interest portion = redemption portion
250 € – 12,50 € = 237,50 €
So in the first month, peter has already received 237.50 € from the recorded 5.000 € paid off. So his remaining debt is only 4.762,50 €. So in the second month, peter's repayment installment is made up as follows:
(4.762,50 x 3,00 %) : 12 months = 11,91 € interest share
250 € – 11.91 € = 238.09 € repayment portion
Peter can pay off a slightly higher amount in the second month than in the first month. However, since the rate remains unchanged, peter does not notice this shift in principle.
What is the repayment plan?
If you take out a loan, you will also find a repayment schedule in the documents for the loan. This indicates the repayment installments to be paid and their due dates. It also shows how the ratio of the interest and repayment portions changes over the term of the loan. The borrower therefore has an overview from the outset of how the repayment of the loan will develop.
How do I find the perfect amount for my repayment installment??
Taking out a loan always means making a major commitment. After all, the loan amount taken out and the interest due on it must also be repaid. Therefore, you need to be sure that the monthly repayment rate also fits into your 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 amortization rate is thus the difference between your regular income (for example, salary) and the sum of your expenses.
It should be noted that a financial buffer is always planned in one's own budget in order to be able to cope with unforeseen expenses. An example illustrates this:
Our peter gets every month a net salary of 2.800 € transferred to his account. His regular expenses for housing, food, car, etc., are paid in full. Amount 1.600 €. If you compare these two sums, you would theoretically have a monthly credit installment in the amount of 1.200 € euro presentable. However, if peter were to take out a loan with such a monthly installment, he would have no financial buffer for unforeseen expenses. A broken washing machine or necessary repairs to the car would present him with real financial problems. A spontaneous vacation would also be out of the question. It makes more sense to set the maximum possible monthly installment at a lower rate. A rate around 600 – 800 € per month would be well conceivable.
If you default on one or more installments, the bank is entitled to terminate the loan and demand immediate payment of the outstanding balance. If this cannot then be paid, unpleasant collection procedures are on the cards.
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. This way, borrowers can also suspend a loan installment once without the bank directly threatening to cancel the loan agreement. In our loan comparison, these banks, among others, offer an installment break:
Conclusion on the right redemption rate
The repayment rate is decisive for whether or not you can afford a loan. Finally, it represents an additional monthly charge and must be able to be guaranteed over the entire term. It always makes sense not to exhaust your personal budget completely in order to be financially prepared for unforeseen events. If you fall behind with the installment payments for a loan, this can result in additional costs for collection proceedings and possibly also negative entries in your credit rating agency .