Loans are an important part of our economy, almost everyone borrows at some point in their lives. Whether it is a mortgage, a student loan or a consumer loan, you should not go in for loan negotiations without getting ready. Keep yourself in the lead by exploring the most important terms and concepts!
However, before you go into a loan negotiation, it is worthwhile to compare the loans impartially. Going one by one to each bank is time consuming and now useless, the loans can be easily and quickly compared in our unbiased loan comparison.
Know your finances
Understanding your need for credit starts with understanding your own finances. A loan is a big purchase and should always be scaled to suit your own finances. How large can you pay? What would happen if interest rates on a loan were to increase or your life situation to change? Sometimes even careful planning does not protect you from unexpected situations.
Banks’ loan offers are usually sized as much as possible, banks are also companies that aim to make a profit. Your finances should remain flexible even after borrowing. For this reason, competitive bidding on loans is also particularly important, and comparative savings can become very significant. My own family bank is not always the most competitive!
Know the term
In loan negotiations, you talk about reference rates and repayment methods, and try to find the loan and loan type that best suits you. Do you already know the difference between Euribor and Prime reference rates and would you prefer the annuity loan or the mortgage loan? To avoid being silent in the negotiations, here is a brief list of important terms:
- Reference rate: If the loan does not have a fixed interest rate, it will be tied to either the Euribor or Prime reference rate, as the client wishes. Euribor describes the euro area money market reference rate, while Prime is a self-determined rate set by banks. Read more about reference rates in our Euribor or Prime guide.
- Margin: In addition to the reference rate, the interest rate of the loan consists of a margin, which is the price set by the bank for the loan. Often, the margin is customer-specific and defines the risk the customer puts on the bank, ie the likelihood of the customer being able to repay his loan effectively. For higher risk customers, the margin is slightly higher.
- An annuity loan, or equal installment loan: In equal installment loans, the loan period always stays the same. If the reference rate changes, it is reflected as a change in the installment.
- Fixed installment loan: The installments always remain the same, no matter what the reference rate changes. The term of the loan may change as the reference rates change.
- In the case of straight-line loans, the repayment of the principal is always the same, but the amount of the installment varies according to the interest rate. The loan installment will reduce the total amount of capital each month. The interest rate of the loan is always calculated on the basis of the current principal amount, ie the amount of the installment changes every month. You may want to go over some of the shortening methods in our guide.
A quick familiarity with the terms will ensure that you do not get your finger in the mouth when negotiating!
Understand the risks
However, the most important thing when applying for a loan is that you understand the risks involved and are able to report them to your own economy. It is in the interest of all parties to take a responsible and prudent loan – both you and the lending financial institution. So even if the loan terms are new acquaintances to you, and you can’t quite tell the type of loan that best suits your economy, be aware of this: Borrowing comes with its own risks, such as possible interest rate increases or changes in your finances.
In order to keep the risks as low as possible, you should start by applying for a loan. This way, you will find that you will find the best loan offer, which will reduce the strain on the loan in your household.