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Loan types and which one suits your needs best?

Is a loan without fixed purpose the right choice or should you rather pick one which is not pre-defined and therefore more flexible? The advantages are quite clear: A loan without fixed purpose can be used to make several necessary purchases at once without anyone asking you about it. If you choose a loan with a certain purpose, e.g. a property loan or a car loan, you will often receive more attractive conditions. In order to give you an overview of the different types of loans and to help you make a decision which loan is the right for you, we would like to introduce the different loan types to you in the following.

Instalment loan

An instalment loan is not a specific loan type but rather an umbrella term for different sorts of loans. As the name already reveals, the borrowed money has to be repaid in several instalments. Duration and interest rates are always to be discussed with your bank prior to receiving the loan. Whilst repaying your loan, the height of the instalments as well as of the interest remains on the same level. If the volume of the credit is below 5.000€, the loan is defined as a microcredit.

When choosing an instalment loan without pre-defined purpose, you can spend the money on whatever you like. However, you should ask yourself if it is really necessary to apply for a loan with your bank. Smaller purchases might be paid with savings or with a private credit from friends and family.

You need to be aware that taking out a loan – and in some cases even applying for one – has influence on your solvency score. Therefore it is advisable to look for alternatives before deciding for a loan. In addition, your bank usually demands some kind of hedge from their customers – mostly, this is your income. This means that in case of you not being able to repay your loan, your bank can keep parts of your loan in order to make up for the bank’s losses.  

Online loan

An online loan is a type of instalment loan which is exclusively available online. As the processing of a loan application takes place very quickly, one often speaks of an instant loan. As services in a local branch are omitted, online loans often have cheaper conditions than offline loans which usually include a high level of service. You should rule out for yourself if the conditions or a personal service is more important to you.

Car Credit

A car credit is – as the name already reveals – connected to the funding of a car. Banks as well as car dealers offer this kind of loan. Mostly, car dealers offer better conditions, however, you should not be misled by the interest rates but also take the prepayment and the balloon payment into consideration. In many cases, loans by a bank are eventually cheaper than the allegedly good teaser offer.

Different from a personal loan, a car credit uses the car itself as a hedge. This way, the bank protects itself from the debtor not being able to pay the instalments for the car. However, this also means that you cannot sell the car before you have repaid the full amount. You should therefore carefully check if you bank accepts a different kind of hedge or if it is content solely with a solvency check.

Homeowner loan

A homeowner loan is also a loan with a particular purpose which is linked to investments connected to building or buying a house or a flat. Homeowner loans are also known as construction financing. While an instalment loan is hedged with the income of the debtor, a homeowner loan is hedged with the property itself. If the debtor is unable to repay the loan, the bank is allowed to sell the house or flat in a foreclosure auction and to use the money to finance the remaining debt.

Due to the high costs of a property purchase, it is worth comparing offers and making use of extensive consulting services before deciding for a particular homeowner loan. This way, it is often possible to save hundreds or even thousands of Euros.

In addition to the costs of a homeowner loan, you should check if you have to expect extra costs at you local municipality or at a notary.

Refurbishment loan

A refurbishment loan is a kind of instalment loan that can be used for maintenance and refurbishment works as well as means to increase energy efficiency. As these kinds of work usually increase the value of the property, they are often worth the investment.

Unlike a homeowner loan, there are no additional costs to be expected. Further, banks are usually open for extracurricular payments in order to repay the loan faster.

Student loan

Student loans are not comparable to normal instalment loans. The biggest difference: You will not receive the full amount of money in one go but in monthly instalments. This way, one is not tempted to spend the money on anything but the monthly living costs and to sum up debt.  

To receive a student loan, your parents’ income does not play a role. However, a student loan is not free of interest – therefore you will have to repay a higher amount than you have received.You should always keep this in mind. When looking for a student loan you should pay a lot of attention to the height of the interest rate. Some banks offer loans with variable interest which means that the rates change after a certain period of time. Of course, this can have a positive as well as negative impact. To play it safe, you should go for a non-variable interest rate.

A further difference to the instalment loan: After having received the loan, the bank usually grants it’s debtor a certain period of time where he does not have to repay any money. The debtor can use this time to look for a job and to earn some money before having to repay the loan in monthly instalments.

Before applying for a student loan, you should check with your bank if they support your university and your programme. In some cases banks are specialised in certain subject areas and do not grant everyone a loan.

Debt conversion

Debt conversion is a way to swap an existing, expensive loan for a cheaper one. Under certain circumstances, a debt conversion can convert several old loans into one, cheap loan. A debt conversion makes most sense during a period of low interest rates. This way, you might be able to save hundreds or even thousands of euros.

Before deciding for a debt conversion, you should check if the bank which granted you your old loan, expects you to pay a compensation for repaying your loan early. This fee should be included in your calculations before you decide for a particular offer.