By far the majority of loans taken out, especially in the retail sector, are so-called installment loans. More often, it is alternatively referred to as an installment loan. In our article we will go into more detail about what an installment loan is and how it works. We also explain what the typical conditions are and who can usually take out an installment loan.
What is an installment loan?
The main characteristics of an installment loan can already be deduced from the name. It consists in the fact that the amount borrowed is subsequently repaid in installments. In most cases, the installments are collected monthly from the borrower's account. Also characteristic of an installment loan is that it is primarily used to finance consumer spending. These include, for example, the purchase of a new or used car, the financing of a vacation trip or even the financing of a move. Many installment loans are given in blank, i.e. without the bank requiring collateral. Most credit institutions, which are active in the financing sector, offer such an instalment loan.
How does the installment loan work?
Installment credit is relatively popular, due in part to its high level of transparency and ease of understanding. It is easy to explain how an installment loan works. The first step is to apply to the bank for the appropriate installment loan. The lender checks your creditworthiness and the corresponding loan amount is credited to your current account following a positive credit decision.
Before the approval takes place, the bank usually obtains a Schufa report, checks your creditworthiness and your income situation. The approved and disbursed loan is then reported to Schufa. In the final part of the process, you pay the installment loan back to the lender – usually in monthly installments – piece by piece.
What does an installment loan cost?
With installment loans, interest is often the only cost factor, as processing fees have not been allowed to be charged as a lump sum for quite some time now. Loan interest rates, in turn, depend on several factors. Thus all rate loans of the banks can be divided into two large groups, i.e. into the creditworthiness-dependent as well as the creditworthiness-independent interests.
With an interest rate independent of creditworthiness, all borrowers pay the same interest rate if the bank does not make any differences in terms and loan amounts. A creditworthiness-dependent interest rate, on the other hand, is characterized by the fact that your personal creditworthiness is the decisive factor in determining the interest rate charged by the bank. In addition, the cost of an installment loan in the form of interest depends on other factors, such as the prime rate and the current level of interest rates on the market. The interest rates of competitors can also play a role, if the bank sets its own interest rate.
Who receives an installment loan?
To obtain an installment loan, the bank must believe that the borrower's creditworthiness is sufficient. This is primarily based on the following data, figures and documents:
- Schufa information
- Income level
- Employment relationship
- Collateral
- Equity
Equity and collateral play a role especially in installment loans with larger loan amounts, which are used, for example, as loans in construction financing. The bank checks the Schufa information for all installment loans. If there is a negative feature, such as a default summons, the loan is usually not approved. The bank also looks very closely at the income and employment situation of borrowers, as this is used to assess creditworthiness.
How and where to get an installment loan?
The vast majority of banks today offer an installment loan, which is usually offered as an installment or consumer loan. Depending on whether it is a branch or direct bank, you can apply for the installment loan locally or via the website of the credit institution. In particular, under the condition that the installment loan is at the same time a digital loan, often only 24 to 48 hours pass between application and disbursement of the loan amount. Since the conditions of the credit institutions are sometimes very different, it is strongly recommended to carry out a loan comparison before taking out an installment loan.