Not an easy decision
Borrowers and lenders struggle equally with the 120-month loan. Binding to each other for 10 years is a difficult risk to calculate. Financing is not a real estate loan where the value of security is expected to grow continuously. It’s about financing a consumer wish or rescheduling. Conceivable security, such as a beautiful new car, expire within the 120 months of worthlessness.
From the lender’s perspective, only the borrower’s income security can ensure the repayment of the loan. In the past, long loan terms were primarily reserved for civil servants and civil servants. Nowadays it’s no longer like that. The credit market has adjusted to demand. Long-term consumer credit is sought and found. If, for example, 25,000 USD are to be financed with the loan for 120 months, the loan comparison shows five providers.
However, only a bank offers fixed-rate interest rates with this long term. LCB Bank would grant all applicants qualified to lend 5.89 percent APR. Despite the low interest rate, three years ago, a comparable loan would have cost around 7.5 percent, borrowers should not make rash decisions. A look at the overall financing costs shows how expensive it is to finance in the long term even when interest rates are low. 7,910.91 USD would cost the financing of 25,000 USD in our example.
Advantages and disadvantages for borrowers – consumer loans over 120 months
The advantages and disadvantages of long-term financing are closely related. Financing a 120-month loan means paying off large amounts of loan in small installments. The model sounds particularly interesting for borrowers willing to reschedule. A pooling of all existing liabilities would bring “order” to the finances, only one credit rate would have to be serviced.
At the same time, long-term debt restructuring could result in noticeably more liquidity in the household budget. Because the usual consumer loans are repaid in a much shorter time. The rate for the long-term loan is therefore always significantly lower than the sum of the installment payments currently to be paid. The only risk is what the income situation will look like in a few years. Can the rate still be paid safely?
All important questions and disadvantages can be summarized under “Life risk – future”. Because nobody can look into the future. What about sickness or unemployment? Would there be a 10-year promise to pay under these circumstances? Does it make sense to hedge against credit risk with a residual debt insurance? Or is it just the 120-month loan that could make the RSV superfluous.
Take out a loan for 120 months – no credit insurance
Residual debt insurance can offer insurance protection against general life risks. Compared to short terms, the high risk of taking out insurance in the event of unemployment, illness or death makes the RSV more expensive for long-term loans. If the loan is “sewn on edge” from the installment amount, there is still no reasonable reason not to insure yourself. It is better to pay significantly more than to go under in debt due to illness or unemployment.
Risk insurance becomes dispensable if the 120-month term was deliberately chosen to avoid an RSV. This option arises if the rate height “sewn on edge” would allow a significantly shorter term. It is important that the rate is calculated correctly so that the savings model works in an emergency. It must be dimensioned in such a way that payment remains possible even with sick pay or ALG 1. Nevertheless, the full term should of course not be exhausted in order not to drive up the financing costs.
The maximum rate charge serves as the basis for calculating the standing order on a savings book. Maximum rate debit minus the amount actually paid results in the savings rate. Most credit institutions grant the right to a free special payment of any amount for a loan for a 120-month financing period. You exercise this right once or twice a year.
If everything goes well, you as the borrower are neither ill nor unemployed, the loan will be paid off much faster than originally agreed. If the income situation changes undesirably negatively, the savings rate is simply that long. Due to the agreed low monthly payment, you will still not experience payment difficulties.
Lifeline debt rescheduling
A loan for a 120-month financing period can bridge financial distress through new, lower installments. If, in this case, the credit rating is probably bad, the procedure is very delicate. We advise you to get expert, free and independent advice from a non-profit debt counseling center.
A loan for 120 months as risk financing can currently cost up to 10 percent effective interest. Paying “only” for the interest is not the point of an installment loan. With professional support and free of charge, it is simply safer to make the upcoming decisions.