The need for a loan is often accompanied by a limited monthly budget. So, logically, many borrowers try to find a loan with small installments in order to keep their monthly burden of repaying the loan as low as possible.
Various factors influence the amount of the monthly rate.
The majority of classic installment loans are linear. All costs for interest, the processing of the loan and other costs are added to the payment amount. The total amount thus formed is divided equally between the individual months of the loan term. This is how the monthly rate is calculated. Since the loan amount is dictated in most cases by the borrower’s money needs and the lender decides on the interest rate based on the applicant’s credit rating, the borrower can usually only influence the monthly rate over the term.
Of course, the rate is lower the longer the term of the loan is agreed. However, due to a longer term, the borrower incurs higher costs in the form of additional interest. Thus, a loan with small installments is often characterized by higher overall costs. For this reason alone, the amount of the monthly installment should not be the sole decision criterion for a specific loan.
If the monthly rate is low, the repayment rate should be considered
Special forms of financing enable loan seekers to take out loans in small installments. The rate is deliberately kept so low that little more than the interest accrued is paid. The actual repayment of the loan amount takes place at the end of the term of the loan. A particularly high balloon rate is due here. The special form of financing is particularly common when financing car purchases.
It is particularly useful if the borrower only wants to bridge a temporary financial shortage and can pay the final installment by the end of the term. However, every borrower should be aware that the low repayment rate means that the interest burden on such a loan is greater than on a loan with linear repayment in each month of the term.