The main loan types in comparison
Loans and credits in particular are classified according to different criteria. Loans can be classified according to who the lender is or to whom the lender grants the loan. Loans, also called money loans, can be categorized according to the purpose of use or the type of application. Here the loans are to be classified according to which regulations apply to repayment and interest and the relationship between these two factors. Interest and repayment regulations have a direct impact on the borrower’s wallet and / or on his monthly charges.
An annuity loan is characterized by two essential features: provided that the percentage interest rate remains the same, the amount of the installments to be paid always remains the same. But something changes within this rate. Each installment consists of a redemption component and an interest component. With every installment paid, the remaining debt is reduced. As a result, the interest component in the rate is continuously smaller. Accordingly, the interest component shifts in favor of the repayment component over time. Annuity loans are dominant in retail banking. This is especially true in the context of real estate financing.
Annuity loans are calculable. The rate is fixed from the start. From a purely mathematical point of view, it is not the cheapest loan type for the borrower. But at least the remaining debt is reduced continuously during the term. This has a positive effect on the total borrowing costs.
There are mainly long-term loans, for example real estate loans. In most cases, the loan is not fully repaid when the fixed interest rate expires. Follow-up financing can become more expensive.
In the case of a repayment loan, a repayment payment that is constant over a certain term is agreed. Each installment consists of the linear repayment and the interest calculated from the remaining debt. The result is rates of different amounts. The first installment is the largest installment. After that, the rates fall continuously. Because the repayments remain the same, the residual debt is reduced. And with that, the interest burden falls. Redemption loans are regularly granted in business customer transactions outside of real estate financing.
In the private customer business, banks often do not offer this loan option at all or only hesitantly.Repayment loans are often referred to as installment loans or installment loans.
While the annuity loan reduces the remaining debt towards the end of the term, the repayment loan with fixed agreed repayment rates is faster compared to the annuity loan. Economically, this type of loan is therefore the cheapest for the borrower.
The initial load is particularly high. In the case of large-sum loans in particular, the initial rates are often not feasible for the borrower.
Maturity loan or final loan
Maturity loans are the counterpart to the repayment loan. There are no repayments during the term. Only current interest payments are owed. When the contract expires, the entire loan amount can be returned with one payment. If necessary, it will be financed through a new loan. In practice, however, maturity loans are always linked to a repayment substitute, a so-called surrogate. Lenders do not rely on their customer to somehow repay the loan after the contract ends.
Any valuable claims or financial investments can be considered as repayment replacements. These include savings, securities holdings, life insurance or building society contracts. In practice, life insurance and home savings contracts are common. Either claims are assigned or, as with securities, a lien is agreed. The surrogate must be designed in such a way that the entire loan amount can be repaid at the specified time.
The actual ongoing burdens from the loan are lower than with other types of loan because the repayment is no longer necessary. However, this advantage is watered to a certain extent by the fact that a surrogate must be saved if it is not already available when the contract is concluded. However, the current rates are generally lower. A real advantage is in the case of renting and leasing. Because then the interest on the debt can be deducted as costs for tax purposes.
The total cost of the final loan is higher than with other types of loans. Because the entire amount has to be paid interest over the entire term. A gradual repayment does not take place. The existence of the amount required to redeem the loan must be certain. This usually leads to saving the surrogate and thus to unnecessary costs.
If capital life insurance is saved as a repayment substitute, only the guaranteed interest rate can be taken into account, but not the other uncertain components of the maturity benefit such as profit sharing. Otherwise there is a risk that the income from the surrogate will not be sufficient to repay the loan.
Term interest loans are installment loans where the total interest amount is added to the loan amount from the outset.
A loan of $ 100,000 is granted with a term of 10 years and an interest rate of 5%. The interest charge is $ 5,000 per year, i.e. $ 50,000 for 10 years. The gross burden is therefore $ 150,000.
The loan is to be repaid in monthly installments. So 120 monthly installments are owed. The gross load is now divided by the monthly installments – 150,000: 120 = $ 1,250. The borrower has to pay installments of $ 1250 per month. The term term interest rate loan thus describes a technique that is possible when granting loans. Interest is calculated from the net loan amount and capitalized at the beginning of the loan term. This increases the borrower’s real loan obligation. This technique is mainly used for installment loans with smaller amounts. Term loans are easy to process for banks and clear for borrowers.
Other loan types
In addition to the types of credit listed above, there are other forms of loan that affect interest and repayments. Two examples are:
Foreign currency loans
Borrowers take out the loan in a foreign currency, but the equivalent of the loan amount is paid in euros. Interest rates are usually only fixed for a short time, up to 12 months, and are based on money market rates in international banking. Interest and repayments are made in the foreign currency. Each installment is converted into euros at the valid exchange rate.
If the interest rates for the foreign currency are lower than those in the euro zone, the loan tends to be cheaper for the borrower. If the rate of the euro rises against the foreign currency during the term, the borrower saves on repayments.
Foreign currency loans are, on the one hand, currency speculation and, on the other hand, speculation on key interest rate developments in different currency areas. If the euro sinks against the foreign currency, the repayments are more expensive for the borrower. Disadvantages also arise if the ratio of the key interest rates to one another changes. Variable loans with short fixed interest rates always pose a risk.
With a forward loan, the borrower secures the current interest for a certain period, for example for 5 years. In retail banking, forward loans are often offered for follow-up financing.
The 5-year fixed-interest period for a real estate loan expires in one year. Interest rates are currently extremely low.
The borrower wants to secure the favorable conditions now with a forward loan. However, a forward loan will not be granted without consideration. The costs can be up to one percent and are often added to the interest rates proportionately.
Favorable credit conditions can be secured for future loans, although not in full due to the additional costs. The borrower buys planning security.
Forward loans include an interest bet. It may or may not open. If the interest falls contrary to the original assumption, the borrower has lost the interest bet.