Which loan is better fixed or reducing

Repayment - repayment of a loan

What is the repayment exactly?

Repayment is the repayment of a loan amount or the settlement of other debts to a creditor. This makes repayment an important term in the credit system and a key component of many financial transactions with banks, credit institutions or private lenders.

How loan repayment works

Anyone who takes out a loan has to pay back the borrowed money at some point. This repayment is known as the repayment. Interest is also due on almost every loan; this interest component must be paid in addition to the repayment. The same applies to other costs associated with a loan. In practice, this often causes confusion if there is no distinction between repayment, interest and other costs in loan installments. A debt is repaid when the entire loan plus any interest and other costs has been paid back. In the case of a consumer loan, this can already be after a few months, in the case of a home loan, on the other hand, the repayment period is usually many years or even decades.

What is the difference between repayment and collective debt?

The repayment refers to the repayment of the loan amount and is therefore only part of the total debt. In return for providing the loan amount and the associated risk of default, the lender generally receives an interest component in addition to the loan amount. The interest is usually calculated as a percentage of the loan amount and added to the loan amount. In some cases, other costs are also regulated in the loan agreement between the borrower and the lender, for example processing fees or costs for special repayments if larger amounts can be repaid unexpectedly. With many types of loan, the repayment is paid in the form of a regular installment that is divided over the duration of the loan. The installment is usually made up of repayment, interest component and possibly other costs.

What types of repayment are there?

There are several ways to pay off a loan amount or debt. For many loans such as a personal loan, the financing of a property, a mortgage loan or an investment loan, a repayment plan is created that provides for the regular, usually monthly payment of a loan installment :

  • Installment loan: With this loan, regular installments are paid, which include both repayment and interest. The amount of the installment decreases continuously, since the repayment portion remains the same, but the portion of the interest decreases during the term due to the continuously decreasing residual debt.

  • Annuity loan: The annuity loan is often used, especially in mortgage lending. Here the rate remains the same, so that the repayment portion increases continuously, while the interest amount decreases due to the decreasing residual debt.

  • Bullet loan: In contrast to the installment loan or the annuity loan, the loan amount for bullet loans is not paid in regular installments. Instead, the remaining debt is due on a specific date.

  • Current account credit: This type of credit is often granted for business accounts; the account overdraft facility for private checking accounts is also a current account credit. Interest accrues as long as the loan amount has not been repaid, but the total debt can be repaid at any time in any amount.

  • Balloon loan: The balloon loan is often used in the financing of passenger cars, where a large part of the repayment is repaid in a final installment. With the balloon loan, there is a repayment plan, but no regular and consistently high repayment rate.

What happens if there are disruptions in repayment?

The repayment is an essential part of all credit transactions and financing. If the borrower does not have enough liquidity, there may be repayment problems. In the case of mortgage lending, for example, this is more often the case when unforeseeable events such as unemployment or illness occur. Since such a loan is repaid over a period of many years, the risk of repayment disruptions is relatively high. If you cannot service your loan installment, you should contact the lender as soon as possible. After consultation with the bank, a temporary suspension of the repayment installment for the construction loan can often be agreed; this is also referred to as deferral.

The installments due are not waived, only postponed. Both parties can negotiate a new repayment agreement that is easier for the borrower to use. For example, the duration of the loan can be extended so that the individual loan installments are reduced. However, this is not only beneficial for the borrower, because a longer-term loan usually also increases the amount of interest that must be paid to the bank, so that the total debt to the bank becomes higher.

How do the loan term, interest and repayment affect each other?

As a rule, a high repayment rate and a short repayment term reduce the interest rate, while a low repayment installment and a long term of a loan increase the sum of the interest paid and thus also the total debt - the loan becomes more expensive. In the case of real estate loans and mortgage lending, the fixed interest rate can also increase the interest rate over a period of several years.