Overview of credit types: how the repayment differs

Take out a loan, no problem. Find the right banking partner quickly, thanks to credit comparison and online reviews, no problem either. Payback cleverly and use all possibilities? Difficult. Because you first need to know what is possible. Because even if the most popular repayment method in Austria is the so-called annuity repayment, there are also other variants of the loan repayment that have their advantages. A brief overview of the different repayment options for a loan will help you to better tailor your financing to your needs.

Whoever borrows has to pay

Whoever borrows has to pay

If you borrow money from the bank, you must pay it back including interest. The bank receives the interest as a fee for the provision of the money. No matter which repayment option you choose, you will not be able to avoid the interest. Usually, a loan usually results in a monthly charge. A cost factor you should expect! How high the individual installments will be depends not only on the loan amount and term, but also on the loan option you have chosen.

In the following, we present three types of credit with significant differences in the installment : the annuity loan, the repayment loan and the final loan. In the graphic below you can see a schematic representation of how the rates differ for the individual loan variants.

The 3 types of credit: when it pays off and how it works

The 3 types of credit: when it pays off and how it works

For the sake of simplicity, a loan with a four-month term was chosen for the example, but the principle also applies to loans with a ten-year term. You can clearly see that the rates are different for each loan. And also how the monthly load and its composition change. You can read in detail how these changes result in the individual loans below.

The annuity loan – constant and predictable

Most loans in Austria are designed as annuity loans. This is not least due to the easy handling for the consumer. Due to a complex calculation formula, the rates for annuity loans are always the same during the term. Each installment consists of a redemption component and an interest component. In the course of the repayment, the amount of the shares shifts within the rate. These internal calculations have no effect on you as a borrower, you simply pay back the same amount every month.

So you always know exactly what you have to pay. This makes financial planning easier for years to come. Even if you make additional repayments, the rate remains the same, only the term changes. Fortunately, you don’t have to calculate such annuity loan changes yourself, the bank does it for you.

With the loan agreement, you will receive a repayment plan that explains exactly how the installments are made up and how high the remaining debt is. The repayment schedule shows the entire loan term so that you can plan optimally. If there are changes due to rate adjustments or special repayments, a new plan will be sent to you.

The repayment loan – first a lot, then a little

The repayment loan is structured similarly to the annuity loan. Here too, part of the loan debt is repaid and interest paid every month. The composition within the rates is different. The repayment portion of the repayment loan always remains the same. Then there are the interest rates. In this case, the interest component is always based on the remaining debt. Every month a new calculation is made to determine how much remaining debt is still available and is offset against the corresponding interest rate on the loan.

This means that at the beginning of the loan the rates are higher than at the end of the term. This is due to the fact that at the beginning the interest portion is still very high due to the high residual debt and decreases with decreasing debt until there is only a tiny amount of interest left in the end. The example above clearly shows this system of the repayment loan.

A repayment loan is more complex for the borrower because you have to pay a different amount to the bank every month. You do not have to do this yourself thanks to the direct debit and repayment plan, but it is still more tedious to work with this system when planning. Nevertheless, the repayment loan has advantages. Due to the decreasing rates, this form of loan is appropriate if the borrower is expecting a lower income in the future, for example because he is retiring. Then it can make sense to pay the full salary for the first few years with the relatively high rates and can also pay off the remaining loan at the end of the term with lower income.

Final credit – credit with a pause function

A specialty is the term loan, also called term loan. With this type of loan, no money is repaid during the term. Only interest on the borrowed money is paid to the bank. Only at the end of the term will the loan debt be repaid in a large one-off amount. This variant of the loan is particularly useful if, for example, you have tied-up equity capital that will not become available until a later point in time or you can expect a larger amount of money from another source, such as a property sale or life insurance policy. Then such a loan can be worthwhile.

In practice, most maturity loans only become lucrative after a term of 12 to 15 years. This is why they are often used for mortgage loans. The combination with a lucrative investment option is also conceivable. Then, in the best case, the system generates a higher return than the loan interest costs and at the same time serves as security and transfer fee for the final loan. Of course, this tactic carries a certain risk because it is based entirely on the success of the system.

Another possible combination is with a classic installment loan, especially for larger loan amounts. First of all, a final loan is taken out, which is then redeemed with free capital and – due to the high loan amount – an installment loan. After that, only the installment loan is repaid. You should only approach this form of debt rescheduling between two types of loan in consultation with a financial or bank advisor in order to obtain the best possible terms.

Let us advise you!

Let us advise you!

For most Austrians, a simple installment loan with annuity repayment is completely sufficient. Smaller loan amounts in particular can be repaid quickly and easily. A multitude of offers are offered online, from which you can easily filter out the cheapest provider. In special financial situations or circumstances, it may make sense to deviate from the standard. Installment repayment and the final loan also have their advantages and, depending on your individual situation, may be the better choice.

If you are unsure whether, for example, you should better use existing capital for a final loan instead of an installment loan, then you should seek advice. This is not only possible in branches, direct banks also offer advice online or by telephone. In this way you can also receive offers for the other loan options that have so far rarely been offered online and then compare which repayment method is most suitable for you personally.

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