Saving is no longer worth it – so get out the dough? Zero interest rates lure consumers into installment loans. But this can become a debt trap. Why the cheapest installment loan is not necessarily the best one.
The minus interest rate world is crazy. The advertising campaign of the furniture retailer "Who's perfect" shows how crazy it is. On the occasion of its 20th anniversary, the company is currently drawing attention to itself with a "negative interest financing" offer. Customers not only finance their new piece of designer furniture for zero percent, they actually get paid one percent of the purchase price.
With such bait-and-switch offers, it's hardly surprising that large purchases are financed by loan. Saving is hardly worth it anyway with the current zero interest rates, and many consumers are using the time to make investments like buying a new kitchen or expensive furniture. According to the German Bankers Association (BdB), consumer loans totaling 130 billion euros were granted last year – 8.7 percent more than in the previous year.
Critics view this development with concern. The zero interest rate world could become a debt trap for many consumers in this way. Because even if the interest rate is very low, the installments must be paid regularly over a very long period of time. Installment loans, on the other hand, can make sense when it comes to paying off a normally much more expensive overdraft facility.
Many banks want to exploit consumers' new propensity to spend and lure them with seemingly attractive offers for installment loans. However, one should not let oneself be blinded by the favorable conditions. Often there are only if the borrower meets certain conditions. As a result, Frankfurt-based FMH Finanzberatung analyzed numerous installment loan offers for WirtschaftsWoche Online and filtered out the most flexible ones.
"With an installment loan it depends not only on the interest to be paid", warns Max autumn, owner of FMH Finanzberatung. It would also be important to consider how flexible the borrower is. Can I make unscheduled repayments at any time without incurring fees? Can I choose whether to pay my installment at the beginning or only at the end of the month? Can I skip a few installments without the loan being labeled as non-performing?? Borrowers should clarify these questions before signing the contract.
A total of 23 nationwide providers were compared. The study examined installment loans over 10.000 euros for a term of 48 months. In the end, it's not necessarily the cheapest provider that comes out on top, but the one that not only offers low interest rates, but can also score points with flexible and favorable services. The test took into account whether unscheduled repayment is possible free of charge, whether the loan can be redeemed free of charge and whether the installment date and installment amount can be changed flexibly. Flexibility points are also earned by banks that allow their customers to pause installments by month or offer an extended cancellation period.
Compare creditworthiness (un)dependent offers
Typically, the interest rate consumers pay on their installment loan depends on their credit rating, which is how secure the bank thinks their ability to pay is. However, many providers also have loans that are granted regardless of the respective credit rating. On average, the interest rates here are somewhat higher than in the creditworthiness-dependent offers for best and good credit ratings. Say: those with enough reserves should get a quote from both sets of bids, if possible.
ING Diba performs best among offers that are not tied to creditworthiness. While it doesn't offer the cheapest deal at 3.99 percent effective interest, it pulls ahead of other providers thanks to good service. Points collect the Dutch among other things with their free special notice as well as the free redemption of the loan before contract end. Of all the banks tested, ING scored the most flexibility points.
Even the well-placed SKG Bank and Deutsche Kreditbank offer not only favorable interest rates below four percent, but also good service.
Tempting for banks, problematic for consumers
Oyak Anchor Bank is different. With 3,59 per cent the Frankfurt deliver admittedly the lowest interest for creditworthiness-independent offers. In comparison, it's still only enough for fifth place, because the bank only allows changes to the general conditions and early redemption of the loan amount for a fee. Free unscheduled repayments are only available for ten percent of the loan amount per year.
Barclaycard Barclays Bank performs particularly well in each of the credit-dependent offers. Not only does the bank offer the lowest interest rate in each case – 2.45 percent with the best credit rating, 4.15 percent for offers with 2/3 interest, i.e. the interest rate that two-thirds of all customers would receive. Behind ING Diba, Barclaycard Barclays Bank is in second place in terms of flexibility. Above all, the extended revocation period is viewed positively by financial expert Herbst.
"Not every installment loan that is touted as flexible is really flexible," says Herbst. It advises credit customers to choose banks with customer-friendly offers. Often pays off in the long run. If the customer changes employers and now receives his salary instead of at the end of the month at 15. each month, it may make sense to also change the timing to installment payment.
In principle, consumers also benefit from the current ultra-low interest rates on installment loans; the cost of the loan is significantly lower than, for example, the cost of an overdraft loan. Those who allow themselves to be blinded by this are threatened by the debt trap. Consumer advocates warn against bait-and-switch offers – particularly low, unrealistic interest rates are used to attract prospective customers, who often do not receive the advertised interest rate at all, but have to pay more instead.
After the Federal Court of Justice banned processing fees for granting consumer loans, consumer protectionists fear that banks could instead demand other individual fees. There are no signs of this across the board yet, however, but some banks have already started to do so.
Nevertheless, banks advertise their installment loans vigorously, the loans are becoming more and more attractive for the financial institutions. No wonder, after all, the institutions are on the part of the European Central Bank ( ECB ) even encouraged to give more loans to their customers. Banks that can increase their lending get the long-term loans from the central bank at the current deposit rate of minus 0.4 percent – so they get money for taking out loans.
Installment loans are a growth driver
Above all, the lending business in the banking sector is considered one of the few remaining areas where margins are still somewhat reasonable. No wonder, then, that the banks want to fire up the consumer loan business with promotional offers.
Others are just getting in on the act. Commerzbank subsidiary comdirect has been offering its own installment loans since April; previously, it only acted as an intermediary. Customers can now get loans with a credit amount of up to 50.Get 000 euros, the conclusion is made online.
The mother bank also recently advertised strongly for installment loans and once again had a Commerzbanker in a gray hooded sweater jog across Germany's TV screens at prime time for this purpose. This time, the runner was Frederik Mahlmann, a branch manager in Rheine, who passed a store with expensive kitchens on his morning jog. This, so the message, he could afford with the Commerzbank installment loan from 2.95 percent interest.
This has obviously paid off: new business in the first quarter of this year rose by 44 percent year-on-year. "We have completely reorganized and modernized our installment loan business in recent years," a spokesman for the bank explains. Loans are more flexible today, making them attractive to new customers, the bank says, explaining its promotional push. In addition, he said, the loans are a "growth driver for Commerzbank".
A connection to the policy of the ECB does not see the bank however. "Our main concern is that customers have an increasing need for installment loans," says the spokesman. The business segment had been pushed regardless of the low-interest phase.