Long loan terms make the loan more expensive
The total loan costs consist of the loan amount, the sum of the monthly interest costs and the processing costs. With a longer loan term, the monthly charge decreases due to the lower repayment rate, but with a longer term you also pay more interest because this is calculated for each month of the term.
List your earnings
Suppose you need financing for the living room furnishings and would like to take out a loan of 4,000 USD for this. Then you should note the following. Facilities are generally long-lived assets, i.e. purchases that you will not renew in a hurry. You should choose the loan term so that you can easily pay the monthly installments from your freely disposable income. This is calculated from the sum of your income minus your current expenses. Income includes net income and other income such as social benefits (child benefit, parental benefit), capital income and rental income. You should list your expenses as precisely as possible so that you can calculate your freely disposable income.
Calculate your monthly expenses accurately
The expenses include your monthly payment obligations for rent, electricity, cell phone etc., i.e. payments that are to be made regularly on a monthly basis. When making your household bill, take into account certain payment obligations, such as insurance premiums, which are usually incurred annually or every six months. The rates for loans that are already in progress, the running costs for the car and of course the cost of living for food, clothing and personal hygiene must also be included. In addition, you should include spending on leisure activities such as vacation, cinema, restaurant visits, because you definitely do not want to do without that.
Only the freely disposable income is decisive
If, after deduction of all monthly payment obligations, you can freely dispose, for example, of 300 USD a month, then you should not use this amount completely for the installment repayment. Take unforeseen events into account when planning. Maybe the washing machine breaks or your son suddenly needs money for a school trip. In the example described, the monthly installments should not exceed 100 USD. The loan term now of course depends on the conditions – especially the interest rates – which differ from bank to bank.
Compare the APR
Financial service providers not only specify the borrowing rate, but also the effective annual rate so that the various offers can be compared directly. The APR includes all the cost components of a loan, including ancillary costs such as processing fees. It is a few hundredths of a percent above the annual borrowing rate. If you compare the offers of the different providers, you will be guided by the effective annual interest rate.