When consumers get a loan, both the lender and the borrower have an interest in ensuring that the agreements resulting from the loan agreement are respected. The bank in particular insists that the loan installment be paid regularly in accordance with the agreements in the loan agreement. And the borrower has the goal of eventually repaying the loan in full. To ensure this, the payment of a monthly installment for loans is agreed in the loan agreement.
Components of the monthly installment
This monthly installment for loans is usually made up of different building blocks.
One of the building blocks of the monthly loan installment is the interest rate. This is based on the market prices applicable at the time of the conclusion of the contract, for which the bank borrows money on the capital market and which it then passes on to its customers – usually at a premium.
Another component of the monthly loan installment is repayment. How high the borrower sets the repayment depends primarily on his economic situation. The rule is 1% redemption per year. If, for example, the loan is to be repaid with a shorter term, a higher repayment is agreed, but this also increases the monthly charge significantly, depending on the amount of the repayment.
Interest and repayment are therefore the common factors that make up the monthly installment for loans.
However, it is not uncommon for the monthly installment of loans to include the processing fees charged by banks or agency commissions from credit intermediaries. Although these costs are usually already included in the interest rate, they are still part of the monthly installment for loans.
But there is another position that can be taken into account in the monthly loan installment. This is the premium for any credit insurance that may have been taken out. This optional insurance covers the payment of the loan installment in the event that the borrower can no longer pay the installments due to illness, unintentional unemployment or even death. It is an independent insurance, but the premium is added to the loan installment for economic reasons. It makes the loan more expensive and should only be concluded if the borrower has not made other arrangements.