Long-term credit: How to reduce your rate and secure yourself
28 Apr 2025
3
Minutes
Katrin Straub
CEO at nextsure
Are you looking for more financial freedom through lower monthly payments? A long-term loan can be the solution to make substantial purchases without straining your budget. This article will show you how to take advantage of the benefits and strategically avoid the drawbacks.
The topic in brief and concise terms
A long loan term reduces the monthly payment but significantly increases the overall interest costs.
Legal regulations such as the right to special repayment and the capping of prepayment penalties protect you as a borrower.
A good credit rating is the most important lever for favourable interest rates; actively check and optimise your SCHUFA score.
Duration and Rate: Finding the Optimal Compromise
The choice of loan term directly affects the amount of your monthly installment. Doubling the term from, say, 60 to 120 months can halve the monthly installment, creating immediate financial flexibility in everyday life. Many banks offer terms from twelve to 120 months for consumer loans. The biggest advantage is the lower monthly burden, which makes larger purchases possible. A loan of 25,000 euros costs around 386 euros per month with a term of 84 months and an interest rate of 7.99 percent. Finding the right balance is crucial for your financial health. However, a longer term does not only bring advantages but inevitably leads to higher total costs.
Keeping an Eye on Total Costs: Why a Long Term is More Expensive
The longer a loan lasts, the more interest you will pay over the entire duration. This is the main disadvantage of a long term. For a loan of 200,000 Euros with three percent interest, the costs add up to 271,550 Euros after 20 years. If the term is extended to 35 years, the total repayment increases to 329,032 Euros—over 57,000 Euros more. Although the monthly instalment decreases, the interest burden increases significantly. This effect occurs because the outstanding loan balance is paid off more slowly and interest is calculated on a higher amount. With an annuity loan calculator, you can illustrate these differences transparently. The following list clarifies the connection:
Shorter term: Leads to higher instalments but lower total costs.
Longer term: Leads to lower instalments but higher total costs.
Interest rate: Is often higher for longer terms, as the risk for the bank increases.
Planning security: Long fixed interest rates offer protection against rising interest rates, but less flexibility.
Therefore, the balance between a manageable instalment and the total costs is the most important step in the loan decision.
Legal Framework: Know Your Rights as a Borrower
As a borrower in Germany, you benefit from comprehensive protection under the German Civil Code (BGB). You have the right at any time to repay your loan in full or in part ahead of schedule (§ 500 BGB). This allows you to save on interest costs through special repayments and to become debt-free more quickly. Banks may charge a compensation fee for this early repayment, which is legally capped. The so-called early repayment penalty for installment loans can be up to a maximum of one percent of the remaining balance. If the loan term is less than twelve months, it is reduced to only 0.5 percent. Our expert tip: Look for free special repayment options in the loan agreement. Many banks offer the possibility to repay up to five percent of the loan amount free of charge once a year. This flexibility can save you several hundred euros in interest over the years.
Risk Factor Residual Debt Insurance: Protection or Cost Trap?
Banks often offer residual debt insurance (RSV), which is intended to cover unemployment, incapacity for work, or death. Consumer advocates have criticized these insurances for years as expensive and lacking in performance. The costs for an RSV can amount to over ten percent of the loan sum and are often financed, which further increases the interest burden. Since January 2025, the RSV can only be concluded one week after the loan agreement to protect consumers. Carefully examine the contract terms, as there are often long waiting periods or exclusions. For example, involuntary unemployment is often only covered for a maximum of twelve months. Better and cheaper alternatives are often separate term life insurance and disability insurance. Before taking out an expensive RSV, you should check whether you are already adequately insured.
Creditworthiness as a Key: How to Secure Top Conditions
Your creditworthiness, often measured by the SCHUFA score, is crucial for your credit terms. A score above 95 percent is considered good and signals a low risk of default. Banks reward good creditworthiness with lower interest rates. You can actively improve your creditworthiness. Here are four steps you can take immediately:
Check your data: Request a free copy of your data from SCHUFA once a year and correct any incorrect entries.
Reduce accounts: Too many current accounts or credit cards can have a negative effect. Close unused accounts and cards.
Consolidate loans: Combine several small loans into one. This improves oversight and often also the score. Debt restructuring can be useful here.
Pay bills on time: Avoid reminders, as these can lead to a negative entry after two notifications.
Good creditworthiness is the best basis for negotiating a favourable long-term loan.
Strategic Alternatives: When Other Paths Make More Sense
A long-term loan is not always the best solution. Depending on the situation, other forms of financing may be more advantageous. A balloon loan, for example, offers very low installments and a high final payment. This option is suitable if you expect to receive a larger sum of money at the end of the term. For settling an expensive overdraft, a classic installment loan is often the cheaper choice. Debt restructuring of existing liabilities can not only lower the installment but also reduce the overall costs. Our expert tip: Create a detailed household budget to determine your actual financial needs. With a clear household budget, you can better assess which form of credit suits your budget. Sometimes the best solution isn't the most obvious, but rather a well-considered alternative.
Conclusion: With Foresight to Optimal Financing
A loan with a long term for low monthly instalments offers an attractive way to finance larger aspirations. The key to success lies in carefully weighing the low instalment against the unavoidably higher overall costs. Reducing the instalment by 40 percent can be tempting, but the interest costs over 120 months are a crucial factor. Take advantage of your right to make special repayments to actively shorten the term and save costs. A good credit rating ensures you get the best conditions on the market. An informed decision protects you from financial disadvantages and ensures long-term stability. Request an individual risk analysis now: Have your insurance situation checked for free and receive specific optimisation suggestions.
More useful links
Wikipedia provides a general introduction to the topic of credit.
The Deutsche Bundesbank offers statistics on the credit markets.
The Civil Code (BGB) contains section 491 on consumer loan agreements.
The Federal Agency for Civic Education (bpb) provides an article on household debt.
The Federal Ministry of Labour and Social Affairs (BMAS) provides information on the topic of over-indebtedness.
FAQ
What are the typical terms for installment loans?
For installment loans, terms between 12 and 120 months (ten years) are common. For special loans like civil servant loans or mortgage financing, the terms can be significantly longer, sometimes up to 25 years or more.
How does my credit rating affect the loan terms?
Your creditworthiness, measured by the SCHUFA score, directly influences the interest rate. Better creditworthiness means a lower risk for the bank, which is rewarded with lower interest rates. A score over 95 percent is considered very good.
What is an early repayment penalty?
The early repayment penalty is a fee that the bank may charge if you repay a loan before the agreed term ends. It compensates for the bank's lost interest income and is legally limited to a maximum of one percent of the remaining debt.
Is it worth refinancing to extend the term?
Debt restructuring can be beneficial to consolidate several expensive loans and reduce the monthly payment. Whether extending the term alone makes sense depends on the new interest conditions. Often, this leads to higher overall costs.
How can I realistically assess my credit needs?
Create a detailed budget statement where you compare all your monthly income and expenses. The surplus will show you the maximum loan repayment rate you can afford without overloading your budget.
What alternatives are there to residual debt insurance?
Cheaper and often more powerful alternatives are a term life insurance policy for death coverage and a disability insurance policy to protect your ability to work. These typically offer more comprehensive protection on better terms.
