Anyone who takes out an installment loan determines the contractual terms and conditions for taking out the loan together with the lender. The essential parts of the contract, as well as the written form requirement are specified by the legislator. Part of the obligatory contract contents are the net loan amount, the total amount of the loan installments to be paid (including the repayment, interest and other costs), the effective and the nominal interest rate, the costs of the residual debt insurance to cover the remaining debt, as well as the exact description of the one to be ordered collateral. The type of installment loan repayment is also required.
Repayment of the loan
After the loan has been paid out, the borrower begins repaying the amount of money granted. An installment loan repayment is characterized by fixed installments that are paid at regular intervals over the duration of the agreed loan term. The installments are generally due monthly, but can also be agreed for other intervals with the consent of both contracting parties.
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The distinction between interest and principal
The installments for installment loan repayment consist of an interest and a repayment component. The interest component is the monthly interest that arises from taking out the loan. In contrast, the actual loan amount is paid by paying the repayment portion. With the regular repayment of the installments, the loan amount is reduced regularly so that the full amount of money is paid at the end of the loan term. If a borrower is in arrears with payment of the installments, additional costs may arise in the form of default interest.
The premature replacement
The legal reforms in 2010 made it easier for consumers to redeem installment loans early. If the borrower wants to end the installment loan repayment early by paying the remaining amount, the responsible credit institution can now only charge a limited fee of a maximum of 1% of the outstanding amount. Only 0.5% may be requested if the remaining term of the installment loan repayment is less than 12 months.