Taking out an installment loan is currently more attractive than ever. Thanks to the ongoing low interest rate policy, consumers can take out loans at historically low interest rates and thus save cash when financing their purchases. The savings potential is greatest if the low interest rates are used not for an increase in the loan amount, but for faster repayment. See feycat.net for an observation
Example: If you take out an installment loan of $ 10,000 and repay your liabilities over five years at an effective annual interest rate of 3.88 percent, you will benefit from a low monthly rate of $ 183, but will pay a total of $ 999 in interest. If you decide on a financing period of four years, the monthly installment is 225 dollars, but you only pay 798 dollars total interest due to the shorter total term. Your savings: a good 100 dollars.
Because installment loans can be used flexibly, they can not only be used to finance purchases, but also for debt rescheduling in the case of a permanently used overdraft facility. This can significantly reduce the interest burden, since installment loans are often more than half cheaper than overdrafts.
Here is another example: Suppose you want to continuously reduce an overdraft facility with a nominal interest rate of 8.0 percent, currently USD 4,000, over the course of two years. Then your interest charge will be around 340 dollars until your account is back in the black. If, on the other hand, you owe the overdraft facility to an installment loan with an effective annual interest rate of 3.88 percent, your total interest costs are only around 160 dollars and you save a whopping 180 dollars.
For those who already have an installment loan in progress, the search for cheaper alternatives is worthwhile – after all, interest rates for installment loans have fallen steadily in recent years. Even if the legally permissible prepayment penalty is required of one percent of the remaining debt, the calculation can work.
Example: You took out an installment loan with a term of six years three years ago, at that time at an interest rate of 5.5 percent per year. Now the credit balance is still 5,400 dollars, and for the remaining term, 460 dollars would have to be paid in interest. With the repayment of the loan and the conclusion of a new three-year installment loan with an effective interest rate of 3.88 percent, the interest burden drops to only USD 323. Even if a prepayment penalty of 54 dollars is requested, you still save 83 dollars.