For banks, loans are lucrative everyday business. For consumers, on the other hand, borrowing is not a routine matter, but always something special. Above all, of course, this applies to people who take out their first loan.
What type of loan and what amount of loan are appropriate? What duration is useful? Which additional agreements are advantageous for consumers?
Credit agreements contain a number of specialist clauses, the content and above all the effects of which borrowers should know before concluding a loan agreement.
At first glance, some regulations appear reasonable and advantageous, but when you look closely, they turn out to be cost traps.
Below we explain the most common cost traps for loans and the economic dangers that borrowing can pose to consumers if borrowing is too careless.
Avoid dangers in borrowing
The biggest danger in borrowing is overestimating economic opportunities. The chosen loan amount is too high. You cannot actually afford a loan for this amount. Or the term is too short so that the monthly installments can only be shown with great difficulty.
Before borrowers enter a bank or open a direct bank’s website, these questions should be resolved:
- What is the credit requirement? The estimated amount should be realistic and, above all, should not be too low. Loan increases are complicated. Increases are often not possible, so a further loan agreement must be concluded. In any case, there is another credit check. Multiple loans at the same time worsen the credit score.
- What term should I choose? The term is based on the normal useful life of the object to be financed. The duration can be shorter if the higher installments can be paid. However, a longer runtime is not recommended.
- Can I afford the planned loan? A financial plan provides information about this. All income is compared to all expenses and obligations. The difference minus a safety margin can be used to pay the monthly installments. The budget should take into account future expenses that are already foreseeable. The current average interest rates specified by the Bundesbank are suitable for calculating the rate. More than 1/3 of the monthly income should not be used to repay the loan.
- Which type of loan makes sense? Choosing the right loan type can save you money. Dedicated car loans or residential loans are cheaper than free-standing installment loans. Very short-term financial requirements for smaller amounts are best represented via a disposition loan or a real credit line (call credit). The prerequisite is that the repayment is actually possible at short notice.
- Credit conclusion only from reputable providers. Borrowers will find many semi-silk loans offers in the advertising sections of daily newspapers and other publications and on the Internet. Fast money and large amounts are promised, without a credit check or Credit Checker information. Those who fall for it pay expensive tuition. You can recognize dubious credit providers by the fact that preliminary costs are demanded and the loan offers are unrealistically cheap.
Cost traps when borrowing
Most of the contractual provisions listed under this heading are aggressively promoted by banks as an advantage for borrowers. In individual cases, this actually applies. Under certain circumstances, borrowers can benefit from such clauses. But they tend to be viewed negatively.
Some contractual clauses are rather hidden. You can find them discreetly in the general terms and conditions or in the price list.
Therefore, before entering into each loan agreement, you should always read all the information given carefully.
Interest rate-independent interest rates look cheap on the surface. Everyone who reaches a certain credit rating level receives the same, usually quite low, interest rate. But there are two problems:
Interest is really cheap only for borrowers who show exactly this credit rating (limit credit).
The interest rate level is based on the marginal credit rating. If you have a better credit rating, you pay extra.
Anyone who does not reach the credit limit is actually excluded from lending because the specified interest rate is not risk-appropriate for the bank.
But of course, some banks don’t miss these customers either. You submit a second offer with higher interest.
The conditions for borrowers are often worse than if they had taken out a loan with a credit-related interest rate.
Anyone who concludes thoughtlessly on the worse terms may pay extra.
Being able to pay off a loan in small installments that are hardly significant each month sounds good.
In this way, you can also cope with larger amounts of credit that can be used to fulfill expensive desires.
But even with long terms, the cost trap can snap shut. The longer the term, the more viscous a consumer loan will be paid off.
The result is that the total burden of interest increases. The loan is becoming more expensive overall. In addition, some banks also charge higher interest rates for loans with longer terms.
Loan terms should therefore always correspond to the forecast usage times of the financed item.
Postponement of repayment – repayment-free start-up time
The borrower does not have to start paying in installments, but only in the month after next, for example.
Sometimes even a postponement of repayment is granted over several months. For many Credit Checker-free loans, a postponement of repayment of one month is a mandatory part of the loan agreement.
Not having to start paying in installments sounds good, but it’s expensive. Extending the repayment period increases the total costs.
The same applies to the suspension of repayment. If you use them once or several times, you end up paying more.
Special repayments and early loan repayment
In principle, granted special repayments and loan repayments are a good, cost-reducing thing.
However, this only applies to special repayments if this reduces the loan term. Special repayments and early loan repayments in themselves are no cost traps.
They only become traps if they are not granted free of charge, but if the legally possible prepayment penalty is due.
Sometimes it is not clear on the supply side which of these benefits are free and which are chargeable. Therefore read carefully!
Processing fees are no longer permitted and are no longer charged by banks.
However, this does not have to mean that additional fees (in addition to the reported effective interest rate) cannot be charged in the context of lending and credit processing.
Some credit banks have an impressive price list. Sending statements from the credit account can cost money.
Or the administrative expenses in connection with changes in credit conditions such as special repayments, rate changes or rate breaks can be subject to charges.
No prepayment penalties are charged, but the assertion of a special repayment still costs something in these cases, even if the amounts are not too high.
Advertising with bonuses and gifts
Some banks promise small gifts, cash rewards, and sometimes shopping vouchers when customers take out the loan from them.
This can be a nice touch to the benefit of the borrower if the loan terms are cheap and interest rates are low.
It is not uncommon for such small benefits to hide the fact that the competition offers more consumer-friendly credit terms.
As with all financial products, it is not gifts or new customer bonuses that are decisive for loans, but the regular conditions that every customer receives.
Mortgage Life Insurance
Residual debt insurance is a particularly expensive cost trap. They are always superfluous for consumer loans over normal amounts.
In the case of loans with high sums, such as real estate loans, risk hedging may make sense in individual cases.
Corresponding insurance contracts should always be concluded regardless of the lending.
Credit default insurance offered by banks when lending is usually expensive, and sometimes the customer even pays the additional premiums that bank employees receive for brokering.
In addition, your insurance cover very often leaves something to be desired. There are often waiting times and exclusion lists that clearly limit the scope of insurance.
Some direct banks have preset the application for residual debt insurance in their loan request. This default should always be changed.
Dealer loans and zero percent loans
Dealer loans have increased in importance recently. In particular, zero percent financing is used by retailers as a marketing tool to promote sales.
Of course, it is convenient in itself not to have to pay interest on a loan. But whether the business is advantageous overall depends largely on the purchase price of the object to be financed.
If, for example, there is the same computer cheaper at the competition, even if there is no interest-free loan, the luring offer with a zero percent loan is economically bad business.
Cost traps in connection with zero percent financing are residual debt insurance and the simultaneous conclusion of credit card contracts.
Sometimes it is not entirely clear that an additional credit card has been ordered. Such credit cards should under no circumstances be used but returned immediately.
Compare loans instead of hurriedly
Banks want to sell loans and that is completely legitimate. With their advertising, they try to fascinate customers in such a way that they accept the loan offered without having to search for a long time.
From a bank perspective, this is reasonable, but not from a consumer perspective.
Hurriedly concluded loan contracts are regularly expensive. No loan is so urgent that it cannot wait a few days.
There is always time for a few conditions inquiries, possibly via online credit comparisons or directly at branch banks.
With concrete offers, you get a real market overview and more easily prevent overreaching by credit providers.
Anyone who knows the market can also negotiate competently with their house bank if they prefer a degree there.
With an alternative loan offer in their pockets, many customers have already got good credit terms from their house bank.