Saved money, but the amount is not enough to finance a specific material desire or goal? In such cases, consumers often apply for a loan. But not all loans are the same; there are different types.
The interest rate and other costs can vary greatly. “Interested parties should therefore always inquire about the loan conditions from several providers and compare them with each other,” says Kathleen Altmann from the Federal Association of German Banks in Berlin. Here is an overview of the seven most common loans in Germany.
1. Dispokredit
If money regularly flows into the current account, bank customers are granted an overdraft facility upon request up to the agreed amount – usually three months’ salary – in the event of an account overdraft. “In this respect, an overdraft facility provides bank customers with liquidity quickly and easily,” says Markus Latta from the Bavarian Consumer Service in the KDBF (Catholic German Women’s Association).
The disadvantages of the overdraft: “It is comparatively very expensive due to high loan interest rates, which currently average 12.3 percent per year,” says Latta. It can also become an over-indebtedness trap because there are no fixed repayment rates or specifications and bank customers can always use it from the normal cash flow in their current account.
2. Installment loan
An installment loan – also known as a consumer loan or personal loan – comes with fixed repayment installments and a fixed term. “With some types of installment loans, the loan amount is used for a specific purpose,” says Latta. An installment loan is ideal for purchases such as a kitchen or a washing machine. A larger celebration or vacation can also be financed this way. The interest rate on an installment loan is usually fixed.
The disadvantages: “Here, too, there is a risk of over-indebtedness, as several loan agreements are possible in parallel,” says Latta. In addition, the interest rate for some providers depends on your creditworthiness; a poorer creditworthiness means higher interest rates. The average interest rate on an installment loan is currently 7.61 percent.
3. Car loan
A car loan is an installment loan whose purpose is to purchase a car. So here too there is a fixed repayment rate and a fixed term. “Depending on the provider, as is generally the case with installment loans, special repayments or early redemption are possible,” says Markus Latta.
The disadvantages: Here too, the interest rate for some providers depends on your creditworthiness. And: “If the term is long, the remaining loan amount may be higher than the market value of the vehicle,” says the financial expert.
4. Balloon financing
Balloon financing is often offered for car loans. Compared to a regular car loan, the monthly repayment rates are lower. A high final installment is due at the end of the term, as the low monthly installments do not contribute to the full repayment of the loan.
The disadvantages: “There is a higher interest burden because the loan is repaid less due to the lower rate,” says Latta. And: Because of the high final installment, follow-up financing may be necessary, which may result in worse conditions.
5. Instant loan
Instant loans also have a fixed repayment rate and a fixed term. The advantage of this type of loan: No long waiting times for the bank customer, the loan approval from the provider is quick. “An instant loan is not earmarked, the money is freely available,” says Markus Latta.
However, according to the expert, the quick loan decision and the free use of the loan amount are expensive: “Providers sometimes charge higher interest rates than with dedicated installment loans.”
6. Real estate loan
A real estate loan – often referred to as construction financing – is a loan for the construction, purchase or renovation of a house or apartment. The respective credit institution agrees with the customer on a fixed term, a fixed interest rate and a fixed rate. It is possible to take out long terms with fixed interest rates of over 20 years.
The disadvantages: “Early repayment is only possible with an early repayment penalty,” says Markus Latta. A special right of termination only exists after ten years. And: Customers must agree on special repayment options with the bank when concluding the contract; this is no longer possible at a later date.
7. Student loan
This is an installment loan; the loan amount is earmarked for financing studies. “Unlike Bafög, a student loan is independent of the parents’ income,” says Kathleen Altmann from the banking association. Loan security is not necessary.
Expert tip: Get advice from several providers and also ask how flexible the loan is for a semester abroad or vacation. And also inquire about a student loan at your local university: “Sometimes there are university-specific offers,” says Altmann. A possible disadvantage of student loans: There is a limit on how long the course of study can last.
