A long-term loan enables borrowers to pay the borrowed amount using low monthly installments. This consistently attractive circumstance entices to conclude a long term, which banks can, however, pay for.
Long terms increase the risk of default
If a bank grants a loan with a long term, it must weigh up how high the financial default risk is. For security reasons, providers increase the interest rate significantly for longer terms, so that low monthly rates are made possible for consumers, but the total cost of the loan is increased. To calculate the interest rate, the financial institutions calculate with changing income ratios or unpredictable events, which make the risk of non-repayments possible.
Experience has shown that the potential borrower cannot estimate at the time of the application, for example, how his living conditions will be in five to six years. The bank usually grants a reduction in the interest rate over a manageable two to three years.
Longer terms despite higher interest rates
In the awareness of a more expensive loan contract, consumers often take out a long-term loan in order to fulfill personal wishes or dreams. First and foremost, this is intended to reduce the monthly charge, which continues to ensure appropriate liquidity. Optimally, the monthly repayment amount fits perfectly is the available budget of the borrower. Despite the additional burden arising from interest, debtors prefer small and at the same time manageable amounts.
Many consumers want to use the money saved for various forms of retirement provision or other savings investments, for example. It must be calculated individually whether the interest burden or the savings effect is greater at this point. In principle, short terms should be used so that liabilities from debts do not affect the savings potential.
Compare offers and take risks into account
Anyone who decides on a loan with a long term should get comprehensive information. Both various additional costs and the interest rate play an important role here. Long terms are becoming increasingly popular with consumers, which is why financial service providers are placing more and more offers on the market. A comprehensive comparison of the respective offers is definitely worthwhile. Because of the long term, the borrower must look to the future conscientiously and just as realistically. People with frequently changing employers or employees who are exposed to everyday hazards should take out adequate security before entering into the loan agreement.