Installment
What is meant by an installment payment, an installment purchase or a part-payment. In principle, this involves an agreement between the buyer and the seller according to which the buyer repays his debt to the seller by means of smaller installment payments within a specified period.
An installment consists of the principal repayment and interest charged for the installment payment. In an installment payment it is common for a period to be agreed in advance in which the entire sum is to be repaid. Furthermore, installments should remain equal in amount. If an installment cannot be paid for financial reasons, the worst-case consequence can be personal insolvency.
Meaning of the installment in connection with repayment
In financial transactions, repayment refers to the repayment of debts. The term repayment appears with all types of monetary claims, especially with loans, credits or bonds.
While repayment increases liquidity for the creditor, it creates a financial burden for the debtor. Therefore, it is important that the amount of the installment for repayment is oriented to the debtor's financial means. A low repayment often leads to a higher interest burden and a longer loan term, while a repayment that is too high may not be sustainable in the long run.
Repayment in installments is the most common variant. Here the debtor pays installments distributed proportionally over a fixed loan term to settle his debts and the interest incurred. There is also the possibility to suspend repayments, which is referred to as a repayment extension. There are also so-called repayment disruptions.
If the agreed installment is not paid, this constitutes a performance disruption due to debtor default. In this case, the bank has the option to terminate the contract and demand the entire sum immediately. A repayment disruption can be avoided if the debtor applies for a deferral. With a deferral, the repayment period and the respective installment can be renegotiated. Nevertheless, a deferral leads in the long term to a lengthening of the loan term and an increase in the interest burden.
What is meant by an installment loan?
An installment loan is a loan of a fixed sum to a private person, which is repaid with predetermined installments at a fixed interest rate within a specified period. The respective monthly installment includes the loan repayment, the interest and possibly fees for the lending institution.
An installment loan is also referred to as a consumer or acquisition loan, because many consumers take out this loan for a major purchase. As a rule, an installment loan is a standardized bank product specifically offered to private customers. Furthermore, they are the most common loans. They are also available without providing collateral.
The borrower usually only has to prove that he is employed by providing a current pay slip. If the borrower's creditworthiness is not sufficient, a guarantor may be required. It is also common for an installment loan to be taken out together with a residual debt insurance. Interest rates are set individually by the lending institution.
Every loan contract must state the effective interest rate so that the loan costs of different providers can be better compared. Installment loans are also reported to Schufa. The lender may terminate the installment loan if the borrower is in arrears with at least two installments and three dunning notices have been sent, with the third notice announcing the loan termination.
Useful information about the installment and a loan
Only those who are of legal age, have a permanent residence in Germany and can provide a German bank account can obtain an installment loan. Furthermore, the borrower must demonstrate a regular income, preferably in the form of a permanent employment relationship that has already existed for more than six months.
An installment loan is useful if it is intended to repay other debts and the installment loan has a much lower interest rate compared to the other loan. Before taking out a loan, one should first consider how much secure income is available, how high the monthly income is and how large the installment for the loan should be at most. One should also think about the duration of the repayment.
An installment loan can be used in particular to repay a mortgage because interest rates there can be very high. Furthermore, it is important always to read the small print. Those who opt for an installment loan with a fixed interest rate can be sure that the installment will be the same amount every month. A variable interest rate, on the other hand, is linked to the global market value and therefore an installment can sometimes be much higher than before.
One must also not forget that a monthly installment can become a high financial burden, especially if it is not the only loan that has to be repaid.
What else should be considered about installments?
Before an installment loan is concluded, all terms and conditions must be clarified with the lending institution. It is important that the conditions are individually tailored to the borrower's financial possibilities so that each installment can be paid on time and payment difficulties do not occur.
You should also ensure that a right to early repayment is agreed in the contract so that there is an opportunity to repay the installment loan early if the debtor suddenly comes into money. It is also crucial to compare different offers in advance, as there are often better offers on the internet with a very attractive monthly installment. Therefore, it is important to inform yourself about different offers in advance and to compare them. Only in this way can you find the suitable offer.
The special feature of the installment loan is that it is very transparent and versatile, e.g. as a car loan or consumer credit. As a rule, short-, medium- or long-term financing is possible with an installment loan. The loan terms depend on the provider; as a rule the term is between 12 and 84 months.
Lending institutions also like to charge processing fees for installment loans, which are often not very high and an installment loan can still be worthwhile. Once you have decided on a lender, the loan application must be completed and sent to the respective bank together with the documents proving your creditworthiness.
Now it is up to the bank, which will determine within the processing period how the applicant's creditworthiness looks and whether the loan can be approved or not. If the loan is approved, it will not be long before the amount is transferred to the borrower's account and the money can be used freely.