What is an installment loan?
Installment loans are mostly standardized banking products. Borrowers are usually private individuals. Among all the different types of loans, the installment loan is one of the “most popular”. The amounts of the loans generally range between 1,000 and 75,000 USD and have a maximum term of 7 to 10 years. Since the bank usually does not require any real security, installment loans are often referred to as blank loans.
You only have to agree a transfer of wages and salaries in the contract with the bank. If it is the case that the bank does not provide sufficient security in individual cases, this can be remedied by means of a guarantee that can be requested from the bank. However, processing fees have been prohibited by law since October 2014, so you only have to repay the loan amount and the associated interest in monthly installments.
When calculating the interest, not only creditworthiness but also factors such as the age or marital status of the borrower are taken into account. But not only the data of the borrower play a significant role in the interest rate calculation, but also the type of loan itself. The higher the loan interest, the more open the intended use.
So if you already know what you need the loan for, you should definitely find out whether there is a special loan for this and can save about interest. Last but not least, the term also plays a role in the calculation of loan interest.
Are there different types of installment loans?
An installment loan can be used for many things, but the bank would like to weigh up what the money is used for and, with the following more precise description of the loan, specifies what the loan can be used for. Thus, one counts a car or residential loan to the family of installment loans, but the former is therefore tied to the intended use of a car, i.e. the purchase of a car, the latter to the intended use of living, i.e. the purchase of a kitchen.
However, there is also the option of exempting an installment loan specifically for debt restructuring. In summary, however, it must be mentioned that not every installment loan has a binding purpose.
What is residual debt insurance and what role does it play in relation to an installment loan?
Often a residual debt insurance is taken out with the conclusion of an installment loan, which is often offered by many dealers, insurance agents or independent intermediaries in the function as bank credit intermediary. This is a kind of protection for the borrower. If, for example, the borrower dies, their relatives are better financially secured. This applies not only to death, but also to illness or unemployment.
The only catch of this additional protection is the price, which must not be neglected. The existence of this so-called residual debt insurance is criticized because lenders often link these to lending by means of a contract and they usually contain very high commissions.
Are there alternatives to residual debt insurance and what should be considered?
However, there are alternatives to the said insurance when taking out a loan, which should also be known. First of all, before taking out a loan, you should be clear whether you will be able to repay the monthly loan installments in the future. Go through the theoretical cases of illness or unemployment and work out all the options. If you take out a loan of, for example, 10,000 USD over 10 years, the risk of default is not as high as if you took out 100,000 USD over a period of 3 years.
If you want to secure yourself despite your calculations, there are other options than a residual debt insurance. For example, you are free to take out life insurance. You can also use any existing insurance as security. This is because residual debt insurance is nothing more than risk life insurance, the amount of which is adjusted to the course of the loan.