If borrowers repay a loan in small installments, the repayment of the loan takes a correspondingly long time. At the same time, low installment payments do not place an excessive burden on the monthly budget. It is also important for a borrower that the agreement of a long term and small installments improves the creditworthiness.
The installment amount and credit rating
Before granting a loan, a lender checks whether the customer will properly meet his obligations. For this purpose, he makes a Credit bureau request, which informs him about other existing liabilities of the borrower and about any previous irregularities. Another important component of the creditworthiness check is the household account. For this purpose, the lender compares the credit customer’s stated income with the amount of the loan installments to be paid.
If he takes out a loan with small installments, he has a larger amount of money available monthly after deducting the loan repayment than for a loan with larger loan installments. Long terms and correspondingly low installments thus increase the creditworthiness of a credit customer. Even after a loan with a short term and correspondingly high installments has been rejected, a new application with a longer repayment period and thus lower monthly loan installments can often be successfully applied for.
How do small installments affect loan interest rates?
With a few exceptions, longer loan terms lead to higher interest rates. This is understandable because the bank has to guarantee a borrower the interest rate for the entire term. The longer the term of a loan agreement, the more likely there is a risk that the bank will incur additional costs to refinance the loan. Since a loan with small installments can be linked to an above-average interest rate, a careful loan comparison before concluding the loan contract is particularly important.
For this purpose, the borrower obtains several offers and compares them in terms of the annual percentage rate and the contractual terms. Ideally, the lender allows special repayments, so that the lender can partially or completely redeem the loan early with small installments if he achieves extraordinary income.
Loan application on the Internet or in the bank?
Loans with low credit rates can be applied for both online and in a bank. Applying for a loan over the Internet usually leads to a low interest rate, as the bank passes on its cost savings. However, customers who rely on low monthly rates often have very low incomes or poor credit ratings. While lenders active on the Internet make decisions solely on the basis of the documents, a personal loan discussion also affects the personal impression on the loan decision, so that in some cases only personal borrowing is possible.