You are considering taking out a loan and you want clarity. How much will you pay back per month and how long will you continue to pay? You calculate your capacity, and you determine how much money you will ultimately borrow. You view the providers, compare interest rates, even read the fine print. All this to ultimately make a good and well-considered decision. Because you finally want to replace that new kitchen, a renovation or your car.
Where to get a loan?
After careful consideration, comparison, and independent advice, you finally go to work with that one online provider. Through that provider you get a loan from a Spanish bank that currently offers the lowest interest rate. You are satisfied in your new kitchen, but then .. a few years later the interest is suddenly higher, and a year later again? In short, what if you suddenly have to pay a higher interest rate in a few years?
Since 2008, the general interest rate has fallen enormously. The interest rate of the Eurcen bank has long been at a historical record in 2014: 0.25%. That is a quarter percent! This allows banks and other lenders to borrow money cheaply and charge low interest. Money is almost free for banks! That’s why you will find such cheap loans right now, some even advertise with just 4.5 percent. So that is really super cheap money lending for consumers. Imagine you borrow ten thousand USD and you pay everything back in 1 year, so it costs you only 450 USD.
But most people do not pay back their loans in a year. That takes at least five years (and you can also extend a revolving credit to eternity). And who knows whether the interest rate will rise in the meantime? Because what will happen to your loan?
Cheap loan interest
And here comes the not-so-small snag: the interest on your loan rises too! The interest on the revolving credit is extremely flexible. As soon as the first year is over, the lenders can raise the interest at their own discretion, without fuss, without your consent or whatever. Imagine that once in a few years you double your cheap interest from 5 percent to 10 percent?
The good news is that you can always switch to another provider of a revolving credit. This is called your loan refinancing. You can pay off your loan whenever you want (unlike the personal loan). But if the general interest rate of the EB rises, for example to stop inflation as soon as the economy grows faster again, then all providers will raise their interest rates and you will no longer find a cheaper provider.
So this is something to really be aware of and to take into account when making your decision. The same applies if your income suddenly drops. Then the two hundred or five hundred USD that you pay back each month for the new kitchen can arrive quite hard. Like a true millstone that hangs on you, so to speak. Or as a sword of Damocles above your head.
It is therefore good to consider the options for reducing the repayment of your loan. The interest will really not fall (much) further (it is already at a minimum), why would you want to spend years on repayment? The advice thus: better get a debt as short as possible, than take a very long time to repay.