Almost every Austrian takes out a loan in the course of his life. In addition to bridging a financial bottleneck, many borrowers also use the borrowed money to fulfill a long-cherished dream, such as a long trip. As soon as the loan amount arrives in the account, the joy is usually great. However, with the receipt of the money, the repayment of the debt, the so-called repayment of the loan, usually begins. Exactly how this looks depends on the provisions of the concluded contract. In general, the borrower has a certain term, the so-called repayment period, in which the borrower repays the debt in installments.
Choose the right repayment for each loan
Basically, most annuity loans are paid off by paying off monthly installments. These consist of an interest and a redemption component. The interest portion is the part of the installment that the borrower pays to the bank as a fee for borrowing the money. The repayment component, on the other hand, describes the amount with which the loan is actually repaid month after month. If the interest on the loan is high, the borrower pays correspondingly high fees to the bank every month.
The amount of the loan interest depends, among other things, on the economic situation in the country concerned. Loans are currently cheap in Austria. Therefore, it is usually advisable to repay a loan as quickly as possible. The term is recorded in the loan agreement at the beginning. The borrower becomes debt-free faster and can save a lot of interest.
But be careful: if you pay the installments for the repayment of the loan, you may lose quality of life for a long time. It is therefore important to weigh each case individually. The type of repayment also has an impact on the amount of the costs, which is why it is particularly important to compare the different types of credit.
Annuity repayment impresses with continuity
Anyone who has taken out an annuity loan always pays the bank constant credit installments over the entire repayment period. Only the interest and principal portion shift. Customers actively don’t notice any of this, since the monthly rate remains constant. At the start of loan repayment, the initial repayment component is usually lower than the interest component. However, since the customer’s loan debt decreases from rate to rate, the repayment portion will eventually be greater than the payment of the interest.
As a result, the repayment share increases over time. The big advantage of annuity repayment is the ability to plan. Borrowers can expect to pay the monthly installment right from the start and keep their budget. This also makes it particularly easy to record the terms and costs of the annuity loan at a glance with the help of a credit comparison and to filter out the suitable offer.
Pay less every month with repayment loans
The amount that the borrower has yet to repay is generally referred to as residual debt. For example, mortgage loans are rarely paid during the fixed repayment period. In order to repay the remaining debt, the bank and the customer agree on a new contract at new terms after the contract term: Follow-up financing.
Those who opt for a repayment loan are faced with a high financial burden at the beginning of the loan repayment, the rate decreases by rate: At the beginning, the interest component is at its maximum, but it decreases each month. This is because the interest is based on the amount of the current remaining debt. If the remaining debt is still large, a high amount of interest is paid, so the monthly costs are just as high.
The more the borrower repays, the less residual debt remains that can be paid interest on – the interest portion becomes increasingly smaller. The repayment share, however, remains the same every month. The contract customer repays the loan equally month after month.
This financing concept can be particularly advantageous if, for example, the borrower retires during the repayment phase and thus has less money available towards the end of the contract term. Depending on the terms of the contract, the repayment of the installment can also be cheaper than the annuity repayment – but this depends on the individual conditions and interest rates. To be sure, customers should calculate the costs as well as the planned monthly installments, which are incurred over the entire term, before the contract is signed.
Final repayment: Debt-free in one fell swoop
The name actually suggests how this type of repayment works: During the term, the borrower only pays the interest to the bank. The amount of the interest rate is calculated from the interest on the total loan amount to one rate per month. The actual loan must finally be repaid in one fell swoop at the end of the contract term.
This form of financing is usually only worthwhile if the borrower has already saved a very large amount and only needs a rather small amount for his project. In practice, a final loan is rarely used and is usually only given to business customers with good liquidity. In most cases, a final repayment pays more interest on the loan than with other forms of credit, but with particularly good conditions it can also be a cheap financing alternative.
The pitfalls of special repayment
Repayment schedule provides clarity:
The borrower usually does not have to create a repayment schedule. As a rule, he receives it free of charge from the bank in question – for credit contracts with a fixed term, the bank is even obliged to provide it free of charge. The repayment schedule shows which payments the borrower has to make at a certain point in time.
The customer also receives an overview of the interest and additional costs as well as the amount of the current repayment portion. Furthermore, he can see at any time how much remaining debt is left and thus receives a complete outlook until full repayment.
A special repayment is a payment that the borrower makes regardless of the repayment schedule. It is useful if the contract customer unexpectedly has a large sum of money at his disposal, for example through an inheritance or a gift, and he would like to use this to repay the loan. But be careful: If the borrower did not secure the right to special repayment in writing when concluding the contract, it may be that he has to pay fees for extra payments.
As a rule, it is therefore always advisable to take out a loan that contains the right to special repayment as a precaution. Whether the customer actually uses this right is entirely up to him. Special repayments can be defined differently: Many contracts contain restrictions on the amount of special payments. In most cases, these may not be performed as often as desired. Depending on the terms of the contract, for example, a maximum of once a year.
Early repayment of the loan: reason for rejoicing or cost trap?
A new job offer, an unexpected salary increase or even a lottery win: It can never be completely ruled out that credit customers will suddenly get more money than expected. If this is the case, it is only understandable that borrowers would prefer to pay their existing debt directly.
However, this is not always a favorable decision: if a loan is repaid early, banks generally charge a so-called prepayment penalty. This is a penalty fee that credit institutions charge if they lose interest payments due to early repayment of a loan. In the worst case, the prepayment penalty is so high that early loan repayments are hardly worthwhile or even cost additional money.
No money to pay credit installment: what now?
Anyone who has to repay a loan is exposed to an increased financial burden for a certain period of time. If unexpected payment requests are added, despite careful planning, the borrower may not be able to pay the monthly installment. In such a case, the contract customer should at best contact the lender immediately to look for a possible solution together.
Deferral is often possible. This means that the borrower can suspend one or more installments to organize his financial situation. However, these installment payments are not canceled, they are only postponed – after the deferral, the customer must make up their payment.
Emergency solution: Repay the loan longer than planned
If the borrower has simply taken over with the repayment of the loan, there is also the possibility of fundamentally reducing the monthly installment. This decision will generally relieve the contract customers considerably. Banks will usually quickly agree to this solution, as the loan is usually more expensive than originally planned due to the longer term. In general, the following rule of thumb applies to every loan: “The longer the repayment takes, the more money the loan costs”.
Banks do not lend capital out of generosity, but charge fees in the form of interest on the loan. The longer the borrower uses the borrowed money for himself, the longer he also pays interest. Due to the lower monthly repayment, in the case of installment repayment, the remaining debt that can be paid interest is higher – the costs increase. However, if the borrower cannot manage the monthly installment differently, this is a sensible alternative.