The same pay back period and total loan amount are prerequisites to accurately comparing the costs of different loan providers. This is because it is almost always the interest that determines the best value loan. In effect: the lower the interest rate, the less the customer pays for the loan in the end. The important thing is to base a comparison on equitable variables.
So an objective comparison requires identical payback times, interest rate type (fixed rate or variable) as well as an identical loan amount. Of all these, the first criteria is the most important (particularly in terms of the number of payback installments).
Loans stretching over long periods of time quickly drive the costs of the product up. This is because interest is always due on the amount owing. Of course it is an enticing prospect to pay back a loan over a longer period and thereby reduce monthly payments to the bank. However such a course will prolong the debt and ultimately increase the lender’s profit.
Other factors must be considered before fixing the payback time of your
Kredit (loan). For example it would make little sense to pay back a car loan over five years were the vehicle to be replaced after three years. In this case the car owner would be obliged to make payments on something for two years that he neither uses nor owns. At the same time he would presumably be stuck with a new debt for the replacement.
Real annual interest is, in a manner of speaking, the real price of buying
Kredit. With real interest the lender recovers administrative and other costs from the borrower (this is not included in the nominal rate). In Germany some costs, however, are not calculated even through the real interest rate and thus can significantly increase the cost of taking out a
Kredit. Such costs include residual debt insurance, account ownership fees or provision rates.
This is why it is very important to establish when closing the Kredit deal if any residual debt insurance is included in the quote along with any other of the hidden costs mentioned above. With regards to Restschuldversicherung, the insurance, it is worth bearing in mind that this offers the customer little real protection (but certainly secures a handsome commission for the bank or agent).
