The interest rate depends, among other things, on the term and the repayment rates. We explain when, how and why a favorable interest rate is spent.
It will probably be able to do this every time, because money may become a bit scarce, but it is urgently needed to make a purchase, for example. In such situations, many consumers resort to a loan to increase their liquidity in the short term. Should you get into such a situation, it is of course advisable not to accept the best loan offer first, but to compare. Especially when it comes to the cost of the loan, you should try to save as much as possible at this point.
The interest of the loan in advertising …
It is well known from advertising that banks lure with their cheapest loans. The interest rate seems optimal and there are no further costs. However, advertising always has to be put into perspective here too: Banks are now also in competition with other banks and credit institutions, so of course they have to offer the consumer a certain added value – in this case, a cheap loan. If you now go to the bank as a consumer and point out that you would like to apply for this cheap loan, the interest, for example, which appeared so cheap in advertising, is suddenly more expensive.
… and in reality.
How does this happen all at once? In its advertising, the bank naturally assumes an optimal customer who has the perfect conditions to receive such low interest. These conditions, under which the interest rate is favorable, include the borrower’s scoring and the relationship between the term and the repayment rate. In this regard, a small principle can be formulated: the faster the loan is repaid, the lower the interest rate.
Example of home savings and loan agreement: low interest rates, high repayment rates
If you look at one of the most common financial products on the market, you can see very well how this business is going. Let’s take a building society contract with various building societies. Every building society has different building society contracts, which differ in one thing in particular: length and repayment. Here you can also find tariffs with an effective annual interest rate of 1.99% in the home savings contracts. However, if you take a closer look at this tariff, you will quickly see that a relatively short repayment period is also provided for this tariff. However, if the loan interest rate increases, the repayment period also increases and the repayment rates are also lower.
You are faced with a somewhat more difficult decision here: If you want to have a low interest rate, you should also be prepared to repay the loan quickly and with high repayment rates. Whoever can do this should definitely do it. If these funds are not available, you will have to accept a higher effective interest rate, but you can also take more time to repay them.
One thing should definitely not be done: simply accept the loan as it is for the sake of the loan. There are many consumers happy to get a loan at all – but it shouldn’t be at any cost. If you look at the difference between the tariffs, it is clear that the charges for longer repayment periods and low installments are much higher than they are for short repayment and higher installments.