Seven facts about which borrowers need to know

A necessary purchase, a sudden desire to consume or simply the balance of the house bank: loans are useful aids and from the economic life is indispensable.

Consumers, however, often worry too little about their commitment – especially when a loan is taken spontaneously, therefore, often make unnecessary mistakes. Those who know about the following seven terms avoid the biggest pitfalls.

debt service

debt service

The debt service is the sum of interest and principal that the borrower pays to his bank. The debt service is therefore equivalent to the total monthly burden that the borrower has to shoulder.

The amount of the debt service depends on the loan amount, the loan term and the interest rate.

The debt service does not consist of equal interest and principal. Rather, the interest rate decreases with each rate paid by the borrower in favor of the repayment portion, because the total amount of credit outstanding and thus the interest on it fall. The more installments have already been paid, the greater the share of the monthly installment, which actually leads to a decrease in the credit burden.

Payment protection insurance

Payment protection insurance

With residual debt insurance, borrowers can hedge against various risks, especially death, disability and unemployment. The residual debt insurance then pays the installment installments or the total outstanding loan amount if the borrower dies, becomes unemployed or permanently disabled. In this way, one can also protect one’s own credit for unforeseen events. Also, heirs do not have to pay for their own debts in case of cases. Remuneration insurance premiums are paid together with the current monthly installment, even if the loan and the policy are two stand-alone contracts that are not mutually exclusive.

effective interest

effective interest

The effective interest rate indicates the total cost of a loan, including all fees and commissions, and is thus a more reliable indication than the nominal interest rate, which only indicates the interest. The annual percentage rate of charge is always based on a full year and is also stated in this form, no matter how long a loan lasts. Legislators clearly stipulate the explicit statement of the effective interest rate in the Price Indication Ordinance. An example of a large divergence between nominal and effective interest rates is a loan that is not paid out at 100 percent but only 95 percent: the effective interest rate here is significantly higher than the nominal interest rate.

Annuity loan

Annuity loan

Annuity loans are credits in which the repayment is made in monthly equal installments. The monthly installment then consists of interest and repayment and does not change during the repayment. Annuity loans offer consumers the benefit of very good planning security, because the amount of monthly exposure can be conveniently budgeted. Most of the installment loans extended for the consumer goods sector without any specific purpose are designed as annuity loans. Counterexamples are disposition and installment credits, which provide either no (timed) or non-constant repayment.

special payment

 

A special payment is a payment by the borrower above the contractually agreed current installments. With a special payment, the outstanding credit amount is reduced, so that either the monthly installments are lower or the remaining term is reduced until full repayment. Borrowers should agree with their bank that special payments are possible without incurring high fees. This can be used to respond to changes in financial conditions, such as inheritance.

credit bureau clause

credit bureau clause

The credit bureau clause forms part of most credit agreements whereby the claimant authorizes the bank to obtain information from the protection association for general credit protection (credit bureau) about him and thus obtain a picture of the payment history close. The lending bank is also authorized, by means of the credit bureau clause, to notify the credit bureau of non-contractual behavior (such as a loan cancellation by the bank due to continued default in payment), which then receives a corresponding report of the incident into their database. Very few banks offer loans where the borrower does not have to sign the credit bureau clause.

prepayment penalty

prepayment penalty

The indemnity is a charge that banks often apply for special payments or early repayment of a loan. The banks justify the indemnification by claiming that they themselves have to refinance the loan on the capital market and therefore incur costs in case of early repayment. In practice, indemnity allowances for consumer loans can generally be avoided by agreeing with the bank on free special payments or repayments before maturity. If the bank does not agree with the partout, the loan should either be taken elsewhere or the amount of the compensation should be defined as accurately as possible.

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