To conclude a loan with a high purchase time is associated with many advantages, but also with a certain uncertainty. Of course, for a monthly loan, a long term implies a smaller amount, as a 10-year loan, for example, accounts for almost 2 percent of the loan amount plus interest, and a five-year loan accounts for almost twice as much.
It’s best to read more about the differences between short-term and long-term loans.
A high maturity loan has slightly higher interest rates
Each bank lives beside the commission surplus from investment and the sale of insurances also from the difference between purchase price of the money (= paid interest) and the selling price of the money (= charged interest).
With the exception of very short-term overdraft and overdraft interest rates, interest rates tend to rise with maturity. A 10-year federal bond usually brings more than a five-year bond. As the bank should be able to pay at all times, it also tries to establish a matching maturity.
This means that it finances short-term loans with a term of one year, and loans with a five-year term in the medium term. Therefore, a long-term loan also has a higher interest rate. The longer term is thus reflected in the total interest, as well as the interest rate.
A high-term loan can have a higher amount
Anyone who calculates how much credit they can afford at a given monthly installment will be able to represent a higher loan amount by paying the same monthly installment for a longer period of time.
However, two opposing developments must be taken into account here: With the same monthly installment and a loan with a high maturity, you can of course afford a higher loan amount.
Nevertheless, the repayment term should be reasonably related to the purchased investment item or consumption. For example, it does not make much sense to finance a private car for 10 years if you want to get a new car after just five years.
The same applies to the summer vacation! If it is not necessarily a unique experience or a trip around the world, then financing for much less than 12 months is recommended. Because otherwise you pay for example in the summer of 2012, the summer of 2011 and would like to travel again.
The optimal choice of the term thus takes into account both the desired rate and the expected useful life of the purchased item.
A higher risk exists for the loan with a high maturity
In the case of a long-term loan, it should also be borne in mind that future revenues are much more difficult to predict than revenues over the next few months. Whose employers are affected by short-time working or those who are no longer afforded benefits in the field can lose part of the margin.
For this reason, consumer loans should never be planned in such a way that a small drop in monthly income would result in the loan not being serviced.
Of course, this is only slightly weakened for real estate loans, since these also result in an improvement in the cost situation by eliminating the previously paid rent.