It’s a development that is positive for anyone planning a major purchase and considering using a loan – interest rates are in free fall. The unanimous opinion of almost all financial experts is that the current low-interest phase is THE time to make the necessary investments by means of a very cheap loan. But with a form of credit, the effect of a low interest rate phase is by far not as pronounced as the classic consumer loans or installment loans . The speech is of course from the credit line, which represents one of the most expensive types of credit at all. Although for the first time the effective interest rate for the credit line has fallen below the 10 percent mark for the first time for some time (9.91 percent in the national average), it still costs a lot of money compared to a classic installment loan. Because the installment loan can be concluded in the national average with 2.9 percent APR. A difference of 7 percent. Anyone who can even reasonably anticipate, but also recognizes that there is an opportunity in this interest difference for both types of credit – and in terms of “cost savings”. May we look at this opportunity in a simple calculation example.
Installment Loan versus Loan Loan: High Savings Easily Realizable!
Basically, it should first be noted that anyone who uses a granted credit line to bridge financial bottlenecks over a longer period of time is wasting money! This can best be illustrated by a simple but quite impressive calculation example:
The basis of the calculation example is the assumption that a credit line should be rescheduled with the help of a favorable installment loan in the amount of 3000 euros. The estimated term for the installment loan is 36 months with a prevailing interest rate of 2.65% (currently cheapest installment loan offer on this loan amount). The total cost of the loan calculated from this example is compared with the amount that would have accrued on the step-by-step adjustment of the credit over the same period. So far as the basics of the calculation example, so now we look at the result.
More than 300 € interest difference with a 3000 euro credit
So, suppose that a utilized credit line of 3000 euros and this negative amount on the checking account over a period of 3 years in monthly rates would be equalized. If that were the case, then in such a case, a whopping € 458.88 in interest will be paid over the entire term. The total amount for this loan would amount to € 3,458.88. Now in comparison to the variant “replacement of the disbursement credit by means of favorable installment credit”. Again, as already mentioned, it is assumed that a installment loan of € 3,000 is used at an interest rate of 2.65 per cent for a 36-month term. The interest charge over the repayment term would amount to only 122.64 euros! If you compare the two interest charges now together, the result is: 336.24 euros less interest burden on the installment loan compared to the credit line.
The calculation example makes it possible to see quite clearly why consumer appraisers do not tire of warning against the permanent use of a credit line – and rightly so! With the high interest burden and the voluntary nature of a repayment, the risk of indebtedness increases immensely. In this respect, if something should or should be financed by credit, the favorable installment loan should always be brought forward. But even with a financial, short-term bottleneck and a required smaller loan amount less than 1000 euros, the credit line is not the best choice. Here, the mini loan with its fixed repayment date represents the better alternative, despite the higher percentage of interest.