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How is your loan amount calculated?

How much you can borrow depends, among other things, on the level of your income and the type of income. Read more in this blog about how lenders reach a responsible credit limit to ensure that you can borrow money responsibly.

Calculate responsible credit maximum

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To ensure that you are going to borrow in a responsible manner, the lender looks at the so-called ‘responsible credit maximum’. The credit maximum is calculated by taking your net (family) income and subtracting the housing costs and a fixed standard for living. The result of this calculation is called your ‘discharge capacity’.

Determining factors responsible for borrowing money

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There are also a number of specific factors that influence a responsible credit maximum. Consider, for example, your income structure. Do you receive a 13th month or extra allowances? Do you have a temporary employment contract or a permanent employment contract or a pension income? Current loans or credit facilities are also regarded as an important part. All these factors influence your borrowing options and therefore also the maximum borrowing amount.

Personal loan or revolving credit?

Personal loan or revolving credit?

Do you want to take out a loan? In addition to the fact that it is useful that you know in advance how much you can borrow, it is also good to know in advance what type of loan you want to take out.

You can choose from a revolving credit or a personal loan.

Do you want to borrow money for a major purchase? And know in advance how much you pay per month in interest and repayment? Then a personal loan offers a solution. The term, the interest and the monthly amount are fixed for the entire term of the loan. So you know exactly where you stand.

A personal loan also has the advantage that the interest is tax-deductible if you use the loan amount for a renovation or improvement of your house.

Do you need more flexibility and financial scope in unforeseen circumstances? Then a revolving credit can offer a solution. You only pay interest on the amount withdrawn.

You can keep a part of the borrowed amount in reserve, for example for a renovation or unforeseen expenditure. You do not pay interest on this. With revolving credit you pay a monthly repayment that is usually a percentage of the credit limit (for example 1%, 1.5% or 2%). It also happens that you pay a percentage of the outstanding balance.

With revolving credit you can always repay without penalty and withdraw the repaid amount. In this way, you are assured of a piece of financial space and you can dispose of the money immediately in the event of unexpected expenses. The interest rate of revolving credit is variable. This means that it can vary and depends on the current market interest rate. Do you want more certainty? Then the personal loan is the best loan option!

 

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Residual debt insurance – these are the advantages and disadvantages

There is no conversation in a bank branch about a loan that you are not necessarily advised to take out residual debt insurance. There is a simple background to this: if you take out residual debt insurance, your bank advisor usually earns in the form of a commission.

Of course, one should not forget that residual debt insurance makes sense in a number of cases and can become very important protection for many borrowers. But not in every case. Often enough, the disadvantages of residual debt insurance also outweigh the disadvantages and then this type of insurance makes your installment loan unnecessarily more expensive. Therefore, before taking out a loan, it is important to consider carefully whether residual debt insurance is useful and important, or whether you could also do without this insurance in this special case.

What exactly does the residual debt insurance do?

What exactly does the residual debt insurance do?

The residual debt insurance is a protection of the borrower, or in the event of death of the survivor or the heir of the borrower, against exceptional financial situations. The following can be secured:

  • the death
  • Illness / accident etc.
  • unemployment

The benefits look different depending on the insured event. If the death occurs, the residual debt insurance immediately takes over the entire outstanding loan amount, so that the surviving dependents no longer have to worry about the open credit. This variant is a must, especially for larger loans – especially if there are children in the household and the sudden death of one parent would already cause considerable financial confusion in the household.

In the event of illness or an accident, the residual debt insurance can in many cases be designed in such a way that if the continued payment of wages ceases, it will cover the ongoing credit costs for the duration that you are unable to work and therefore only receive sick pay.

You have to consider this with a residual debt insurance

A classic occupational disability is often not covered by the residual debt insurance. As long as sickness benefit is paid here because e.g. B. If an acute illness persists, the residual debt insurance applies due to illness. However, if a full pension for disability would be granted, the benefits would not apply in most cases. You can only rely on permanent coverage in one of the two cases if there is an explicit provision for disability or disability in the respective insurance contracts.

If the inability to work due to illness or accident ends and you receive your normal salary again, you will bear the costs of the current loan independently from this point on.

If unemployment occurs, the same mechanism usually applies as in the case of sickness benefit. If you start a new job, you are again in the obligation to pay – even if your new income is lower than your previous one.

What are the benefits of residual debt insurance?

What are the benefits of residual debt insurance?

It provides reliable protection in the three situations mentioned. The good thing is that in most cases you can only take out separate components of the residual debt insurance. Because some professional groups only need to think about different scenarios to a limited extent. For example, a civil servant or a public sector employee who runs a collective agreement does not run the risk of losing his job. Protection against unemployment is not necessary here.

If you have traditional sickness insurance, sickness insurance covers the difference between your sickness benefit and your monthly salary. In this case, the residual debt insurance is not necessary and only causes additional costs.

Unless you have good life insurance that provides certain financial security for your surviving dependents, death should always be considered. You also have the option of restricting your residual debt insurance to the death and thus saving some insurance premiums.

Capital Lender Tip: Check exactly what form of residual debt insurance you actually need. In this way you can often achieve significant savings in insurance premiums and you really only hedge the risks that can actually be in the room. If you blindly conclude an RSV, you run the risk of double insurance!

Another important advantage is that no health check is required. If you want to take out life insurance, a medical examination will be required in most cases – at least your health status will be clarified by means of various queries by the insurer. If you have illnesses such as high blood pressure, obesity or already suffered heart attacks or strokes, this can significantly increase the cost of life insurance.

The same applies if you have survived a serious illness such as cancer in the past. All these things are not queried with a residual debt insurance.

Overview of the advantages of residual debt insurance

  • Protection of the bereaved in the event of death
  • Protection of the family if there is no income due to illness or unemployment
  • No health check necessary

Disadvantages of residual debt insurance

Disadvantages of residual debt insurance

Despite the advantages mentioned above, residual debt insurance as an insurance solution is repeatedly criticized. This has different backgrounds:

On the one hand, the way in which residual debt insurance is awarded is repeatedly criticized. As a rule, this is tied to the online credit to be granted in each case. This means that the amount of the insurance premium also results from the amount of the loan to be secured. In addition, however, there are in many cases comparatively high closing premiums for the respective credit intermediary or for the lending bank. This ensures relatively high insurance premiums, measured by the frequency with which this insurance is actually used.

Another point of criticism is how this insurance should be paid. With the residual debt insurance, you pay the full insurance premium when the loan contract is concluded. This is then added to the loan amount and paid directly by the lender to the respective insurance company. This increases your loan amount without you ever having the money in your own hands. With comprehensive residual debt insurance with a loan amount of 25,000 USD and a loan term of 10 years, an insurance premium of 3,000 – 4,000 USD can be achieved quickly. Since this has to be co-financed within the framework of the loan, this is clearly noticeable in the monthly debit, as well as in the total cost of the loan.

In addition, you should definitely check the conditions of the residual debt insurance in detail, since many insurers integrate waiting times for the benefits, so that you can not always enjoy full protection of the residual debt insurance if necessary.

Overview of disadvantages of an RSV

  • Comparatively high costs for the insurance itself
  • High closing premiums for the credit intermediary, which means that the consumer often does not even know whether this insurance is recommended to them for conviction or for financial reasons
  • Increase in the loan amount through insurance and the associated significant increase in total loan costs
  • Partly hidden deadlines and waiting times in the insurance conditions

Are there cases in which you should not waive residual debt insurance?

Are there cases in which you should not waive residual debt insurance?

There definitely is. These are briefly summarized:

  • Long-term loans of four or more years,
  • Installment loan with a very high loan amount (loans over 20,000 USD)
  • If the borrower has already received sick pay due to health problems or previous illnesses
  • If the borrower has an employment contract that is permanent, but in an industry that can threaten unemployment
  • For families with children in the household, especially if a single earner takes care of the maintenance of the entire family

Conclusion – the residual debt insurance can be an important protection – even if it is not the perfect insurance solution

There are numerous cases and situations in which residual debt insurance makes sense and is important. Nevertheless, the type of insurance of the residual debt insurance comes with some negative points that have to be considered when taking out the insurance.

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Annuity Loans and the Benefits For Buyers

What is an Annuity Loan?

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If you are flirting with the purchase of your dream property, you have to pay substantial costs and usually choose long-term financing. The usual way is through a mortgage loan. This can cover up to 80 percent of the construction and property costs. As a rule, a certain variant of the mortgage loan is taken out, namely an annuity loan. Annuity means: “The rate remains the same”, and that is the advantage of this type of loan – you know at the beginning of the financing exactly how much money is to be paid to the mortgage lender by the end of the agreed term.

The repayment increases, the interest portion decreases

The repayment increases, the interest portion decreases

The fixed interest rate on an annuity loan is variable or set at four, ten or 20 years. The constant monthly installment is made up of two components: the interest component and the repayment component. Initially, the repayment of the loan is relatively low. However, as the remaining debt shrinks with each payment, the interest portion of the installment decreases and the repayment portion increases. What is the only logical: the higher the repayment, the shorter the term. With low mortgage rates, in particular, experts, therefore, recommend repayment higher than the one percent that is often the norm.

Annuity loan: calculation example

Annuity loan: calculation example

This connection is also an argument for the annuity loan in contrast to some home savings models. A calculation example :

The basis is a financing sum of 100,000 USD and a term of 25 years. The effective interest rate for the first 15 years is 5.01 percent, the monthly charge is USD 623.33. In this annuity loan example, this results in a remaining debt of 43,011.14 USD after 15 years.

With some combination models, almost 60,000 USD remain after the same period. The reason: With the annuity loan, repayment starts immediately, with the home savings variant, the customer only pays the interest on the loan for years, while at the same time the repayment amount is accumulated through a home savings contract.

Advantages and disadvantages of an annuity loan

The advantage of the annuity loan: With a corresponding fixed interest rate, there is a constant monthly charge with precisely calculable residual debt. It is therefore ideal for financing owner-occupied residential property.

The disadvantages: After the rate lock expires, there is a risk of interest rate increases. With variable loans, there is always a risk of rising interest rates – the financial burden of the loan can increase unexpectedly. For the financing of rented Bluebeard, it is usually not the best solution because of the falling interest rate and an increasing repayment component. The reason: the rental income is in most cases constant, while the repayment expenses can increase.

Calculate follow-up financing

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After the fixed interest period, which is often 15 years, follow-up financing is required, since the loan amount has not yet been paid in full. In the case of an annuity loan, the subsequent monthly charge depends on the applicable interest rate. The lower it is, the better for the borrower. If the remaining debt of USD 43,011.14 from the above example is to be paid off over ten years, the rates would be around USD 430 per month at a borrowing rate of around four percent.

Note additional costs

When comparing different financing offers, many builders only consider the effective interest as calculated according to legal regulations. However, this effective interest rate does not include all credit costs. In the case of new buildings, in particular, provision interest and partial payment surcharges accrue for the time between the loan approval and the loan payment. At some banks, borrowers also have to pay fees for determining the blue value. Such costs can significantly increase the effective interest rate.

The special form of full-time loan

Just like with the classic annuity loan, the borrower pays a constant monthly rate, which is made up of the interest rate and the repayment component. However, you do not specify the annual repayment rate here, but determine the period after which you want to be debt-free. This specifies the repayment component with which the loan is repaid in full within the specified time.