Finding a long-term loan sounds promising to many people. Debt restructuring at the current low interest rate is desired. Others promise to realize a big wish with small installments.
Long-term loan offers come from the banking and insurance sectors. Our long-term financing guide explains the advantages and risks.
Long Term Loan – Why Finance Long Term?
Paying large sums in small installments is the background against which a long-term loan is taken out. Triggering factors can be life dreams – for example, the house should be renovated. For others, it is oppressive debts that make the decision to make a loan. Combined legacies and rescheduled long-term debt can mean an increase in liquidity.
Banks offer installment loans with a term of up to 120 months. Insurance companies finance loans for a period of 10 years, 15 years or even up to 20 years. With its zero interest rate policy, the MCB is urging all households to borrow. The “stupid” are the savers who don’t treat themselves to anything today and still can’t make a living from their savings in old age.
Basically, there is nothing wrong with creating sustainable values through a long-term loan or gaining back liquidity. But not every prospect is well advised to finance with a very long term. In addition, not every long-term financing offer is equally accessible to all professional groups. Civil servants finance consumer wishes and debt rescheduling for an extremely long period of time – without real estate security.
Long-term financing over 180 or 240 months – civil servant loan
Civil servant credit from an insurance company has long been seen as the perfect solution for using the good credit rating of a lifetime civil servant to reduce interest rates. Insurance companies offer loan terms of up to 240 months for the construction or renovation of your own home, but also for debt restructuring. The loan is always linked to a capital-forming life insurance policy.
The effective interest rates shown on loans over 180 months or 240 months have always been noticeably higher. But the effective interest rate did not say the last word about the actual financing costs. It was always possible to include surplus shares that were distributed at the end of the term of the term loans. The bottom line was that the insurance loan was extremely inexpensive.
Unfortunately, one consequence of the MCB’s zero interest rates is that life insurance companies are no longer able to earn guaranteed interest rates today. Due to changes in the law, quasi “legalized breach of contract”, interest gains to reduce financing costs are practically absent today. A long-term loan from an insurance company is therefore hardly in line with the market when compared to interest rates.
Long term – secured loan through property
Extremely long terms and minimal interest rates offer current loan offers to people who create lasting value. Real beneficiaries of the low key interest rates are long-term real estate owners who renovate or convert. A loan can be taken out for energy-efficient renovation or age-appropriate living with a term of up to 30 years.
For the first 120 months (10 years), the annual percentage rate is even tied. Financing costs just 0.75 percent effective interest. The government’s repayment grants have not yet been taken into account when assessing the total financing costs. The state donates up to 27,500 USD, with financing of 100,000 USD. The bottom line is that the loan not only costs nothing, but in the form of an increase in real value, even money remains.
Long term consumer credit – rewards the bank
With a long-term loan for consumption or debt rescheduling, prospective creditors prefer to look at the rate. If the repayment period is extended as long as possible, the monthly payment will decrease. Initially, the rate drops rapidly. If, for example, 20,000 USD were financed with the utopian short term of 12 months, the monthly installment would be around 1,700 USD.
The financing costs would be around 420 USD. An extension of the term by one year to 24 months reduces the rate to about half. There would only be a monthly payment of 865 USD. The financing costs rise to around 810 USD at the same time. This means that a 12-month extension of the rate halving and roughly doubling the financing costs.
The same amount financed for 84 months leads to a rate of around 275 USD and financing costs of 3,050 USD. If the long-term loan were extended by 12 months, the monthly installment would be around USD 275. The monthly charge is reduced by just under 15 USD to 260 USD. In return, the financing costs rise to 4,990 USD. For a monthly relief of 15 USD, 940 USD more would have to be paid.