Cheap Credit: What Are “Low” Interest Rates?
Low interest rates are promised everywhere at the end of 2014 (time of contribution), because the interest rate level in the dollarzone is currently quite low. Since the Lite Lender cut its key interest rate to only 0.05% this year, the interest on savings deposits (unpleasant), but also on loans (pleasing), has plummeted. Therefore, cheap mortgage loans are currently available with a short rate fixation period (maximum 10 years) and not too high mortgage lending (around 60 – 70%) under two percent.
Even consumer loans for free use, otherwise the most expensive loans after the overdraft facility, applicants with very good credit ratings can get under two percent with a small loan amount (four digits) and a short term (about two to four years). This is really sensationally cheap. However, these loans are not suitable for all borrowers and not for any purpose. A rough and generalized comparison can show what characterizes cheap loans in 2014 under different conditions:
- Officials receive small consumer loans below two percent.
- The self-employed can finally expect credit-dependent interest rates in the single-digit range even with low and / or fluctuating income.
- Under various conditions, mortgage loans hardly earn interest above three percent. In very favorable cases, they only cost 1.30 – 1.40%.
- Some financial intermediaries have given in to yields on schufa-free loans slightly. Entry interest rates are often around 4.50 – 4.90%.
- Auto loans from branch and direct banks have fallen to 3.90 – 4.80%, an interest rate hike of almost one percent in the past two years.
- Car dealerships are now also granting used car loans for less than two percent and are approaching the phenomenon of zero percent financing in this sector, which was previously reserved for the new car segment.
- The most expensive overdraft rates are hardly above 14.00%. A few years ago, 17.50 – 20.00% was normal. There are already overdraft loans of 7.00%.
- In addition to low interest rates, there are other improvements for borrowers. For example, mortgage loans are becoming more and more common, which enable free special repayments for a really moderate interest premium (below one percent). Until about 2010, this was taboo among mortgage lenders. A prepayment penalty was practically always requested in the event of early termination if the borrower could not prove the urgency of the property sale.
- With installment loans (consumer loans), free special repayment options have practically become widespread. That is also a cheap loan.
- Last, but not least, on 14 May 2014, the BGH, with two groundbreaking judgments (XI ZR 170/13 and XI ZR 405/12), null and void the processing fees for loans that banks and savings banks had been happy to charge up to now explained. A wave of repayment claims in the billions is rolling towards the German financial institutions. A cheap loan is also characterized by the fact that no processing fees are included.
Does this mean that there are cheap loans on every street corner or on any web portal? – Not at all. Consumers still need to look around and, above all, know how cheap a loan can be in their particular situation.
The main features of a cheap loan
The following features are all part of cheap credit. But they are not equally important for everyone. Therefore, the order is given priority, at the top is what is most important for cheap credit:
- low interest rates
- flexible, even very long terms
- high availability for many target groups
- free special repayment options
- good influence of creditworthiness
No further explanation is required that low interest rates are good. In this context, the structure of the annual percentage rate depending on the term should also be mentioned. There are different calculation models used by banks for this, which mean that some financial institutions always have the same difference between the borrowing rate and the annual percentage rate, regardless of the term. For example, with a borrowing rate of 4.7%, the annual percentage rate is 4.9% for two years as well as for eight years. This difference differs at other financial institutions: the effective annual interest rate at the same borrowing rate could be 4.85% for a two-year term and 5.15% for an eight-year term. That would also be natural and normal, because the interest burden actually increases with the term, because the remaining outstanding interest is ultimately paid on. However, most banks level this difference in favor of better transparency. However, this also means that loans with a short term are not subject to the low interest rates that would actually be appropriate. The long terms (up to 120 months) are only offered by very few banks and financial intermediaries.
They lead to a higher interest burden, but also to very low monthly rates, which many consumers find favorable. The feature of high availability for various target groups should also distinguish a cheap loan. Many providers make restrictions: for example, borrowers should be employed or civil servants, the self-employed have a very difficult time, unemployed people, housewives or pensioners have no chance. The free special repayment options characterize most cheap loans (see above), the “good influence of creditworthiness” requires a more detailed explanation. In fact, the creditworthiness of credit-dependent loans can have a more or less favorable influence. For example, civil servants are certainly happy when they receive particularly low (not just a little lower) interest due to their financial reliability. On the other hand, it is quite favorable that loans with poor credit ratings are nevertheless granted, albeit at high interest rates. Self-employed people, for example, want that. However, many banks reject the target group per se instead of simply adjusting interest rates to suit their creditworthiness. Cheap loans are also characterized by flexibility in this regard.
Is a cheap loan characterized by low rates?
No, there is no such connection per se. On the contrary: Low installments result from an extended repayment period, which increases the interest burden. A simple calculation example proves this:
- An installment loan of $ 10,000 with an interest rate of 6.50% costs $ 1,033.64 with a three-year term. The monthly rate in this case is 306.49 USD. With a ten-year term, the interest costs 3,625.76 USD, the monthly rate, however, has dropped to 113.55 USD.
This relationship is underestimated by most borrowers. You look at the low rate and do not even calculate the increased interest burden. In the case of debt rescheduling transactions where it is important to reduce the monthly rate by means of a longer term, there is no alternative. A cheap loan, on the other hand, is characterized by a particularly low interest burden, which, with the same general conditions – net borrowing and interest rate – always comes about by shortening the term and thus increasing the monthly rate.
How can you find a cheap loan?
The best way is to compare loans online. Borrowers use the calculation tools of the comparison portals or banks to adjust the following criteria:
- Net borrowing,
- Term or
A cheap loan is found when the interest burden is as low as possible. The influence of creditworthiness must be taken into account here. There are credit-dependent and credit-independent loans. The latter are given to all borrowers at the same interest rate or are not given if the applicant’s creditworthiness is insufficient. Your interest is slightly above the cheapest rates on credit-related loans. Anyone who does not have sufficient creditworthiness, for example because he works independently, must orient himself on the credit-dependent loan.