Long-term loan: How to lower your repayments and protect yourself
28.04.2025
7
Minutes
Katrin Straub
Managing Director at nextsure
Would you like more financial flexibility through lower monthly repayments? A loan with a long term can be the solution for making larger purchases possible without breaking the budget. This article shows you how to make the most of the advantages and avoid the disadvantages.
The topic in brief and concise terms
A longer loan term lowers the monthly instalment, but significantly increases the total interest costs.
Statutory provisions such as the right to make special repayments and the cap on early repayment charges protect you as a borrower.
A good credit rating is the most important lever for securing favourable interest rates; actively check and optimise your SCHUFA score.
Term and instalment: Finding the optimal compromise
The choice of loan term directly affects the amount of your monthly instalment. Doubling the term, for example from 60 to 120 months, can halve the monthly instalment. This immediately creates more financial breathing room in everyday life. Many banks offer terms from twelve to 120 months for consumer loans. The greatest advantage lies in the lower monthly burden, which makes larger purchases possible. A loan of 25,000 euros costs around 386 euros per month at a term of 84 months and an interest rate of 7.99 per cent. Finding the right balance is crucial for your financial wellbeing. However, a longer term does not only bring advantages; it inevitably leads to higher overall costs.
Total costs at a glance: Why a longer term is more expensive
The longer a loan runs, the more interest you pay over the entire term. That is the main disadvantage of a long term. For a loan of EUR 200,000 at three per cent interest, the total cost over 20 years comes to EUR 271,550. If the term is extended to 35 years, the total repayment rises to EUR 329,032 – more than EUR 57,000 extra. Although the monthly instalment falls, the interest burden increases significantly. This effect occurs because the remaining debt is repaid more slowly and interest accrues on a higher amount. With an annuity loan calculator, you can make these differences clear. The following list illustrates the relationship:
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 certainty: Long fixed-interest periods offer protection against rising interest rates, but less flexibility.
Weighing up an affordable instalment against the total cost is therefore the most important step when deciding on a loan.
Legal framework: Know your rights as a borrower
As a borrower in Germany, you enjoy comprehensive protection under the German Civil Code (BGB). You have the right at any time to repay your loan in full or in part early (§ 500 BGB). This enables you to save on interest costs through special repayments and become debt-free more quickly. Banks may charge compensation for this early repayment, which is legally capped. The so-called early repayment charge may amount to a maximum of 1% of the outstanding balance for instalment loans. If the loan has a term of less than twelve months, it is even only 0.5%. Our expert tip: look for fee-free special repayment options in the loan agreement. Many banks offer the option to repay up to 5% 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 loan repayment insurance: protection or a cost trap?
Banks often offer residual debt insurance (RSV), which is intended to step in in the event of unemployment, incapacity for work or death. Consumer advocates, however, have criticised these policies for years as expensive and offering poor benefits. The cost of an RSV can amount to more than ten per cent of the loan sum and is often financed as part of the loan, which further increases the interest burden. Since January 2025, RSV may only be taken out one week after the credit agreement has been concluded, in order to protect consumers. Check the contract terms carefully, as there are often long waiting periods or exclusions of benefits. For example, involuntary unemployment is often covered for a maximum of twelve months only. Better and more affordable alternatives are often separate term life insurance and occupational disability insurance. Before taking out an expensive RSV, you should check whether you are not already adequately covered.
Creditworthiness as the key: How to secure top terms
Your creditworthiness, often measured by the SCHUFA score, is crucial for credit terms. A score above 95 per cent 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 put into practice right away:
Check your data: Request a free data copy from SCHUFA once a year and have any incorrect entries corrected.
Reduce accounts: Too many current accounts or credit cards can have a negative effect. Cancel unused accounts and cards.
Consolidate loans: Combine several small loans into one. This improves clarity and often the score too. A debt restructuring can make sense here.
Pay bills on time: Avoid reminders, as after two notices they can lead to a negative entry.
Good creditworthiness is the best basis for negotiating a favourable loan with a long term.
Strategic alternatives: When other approaches make more sense
A loan with a long term 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 instalments and a high final payment. This option is suitable if you expect to receive a larger sum of money by the end of the term. To replace an expensive overdraft facility, a classic instalment loan is often the more economical choice. Debt consolidation of existing liabilities can not only reduce the instalment, but also lower the total costs. Our expert tip: Create a detailed household budget to determine your actual financing needs. With a clear household budget, you can better assess which type of loan suits your budget. Sometimes the best solution is not the most obvious one, but a well-considered alternative.
A loan with a long term and low monthly instalments offers an attractive way to finance larger aspirations. The key to success lies in carefully weighing up the lower instalment against the inevitably higher overall costs. A reduction in the instalment of 40 per cent can be tempting, but the interest costs over 120 months are a crucial factor. Use your right to make additional repayments to actively shorten the term and save costs. Good creditworthiness secures you the best terms on the market. A well-founded decision protects you from financial disadvantages and ensures long-term stability. Request an individual risk analysis now: Have your insurance situation reviewed free of charge and receive specific recommendations for optimisation.
More useful links
Wikipedia offers a general introduction to the topic of credit.
The Deutsche Bundesbank provides statistics on the credit markets.
The Civil Code (BGB) contains section 491 on consumer loan agreements.
The Federal Agency for Civic Education (bpb) offers an article on household debt.
The Federal Ministry of Labour and Social Affairs (BMAS) provides information on the topic of overindebtedness.
FAQ
What terms are typical for instalment loans?
For personal loans, terms between 12 and 120 months (ten years) are common. For special loans such as civil servant loans or property finance, the terms can also be significantly longer, in some cases up to 25 years or more.
How does my creditworthiness affect the loan terms?
Your creditworthiness, measured by the SCHUFA score, has a direct impact on the interest rate. Better creditworthiness means less risk for the bank, which is rewarded with lower interest rates. A score above 95 per cent is considered very good.
What is an early repayment charge?
Early repayment compensation is a fee that the bank may charge if you repay a loan before the agreed term ends. It serves as compensation for the bank’s lost interest income and is legally capped at a maximum of one per cent of the remaining debt.
Is it worth refinancing to extend the term?
Debt restructuring can make sense in order to bundle several expensive loans and reduce the monthly instalment. Whether a pure extension of the term is worthwhile depends on the new interest conditions. This often leads to higher total costs.
How can I realistically assess my borrowing needs?
Create a detailed household budget that compares all monthly income and expenses. The surplus shows you the maximum loan instalment you can afford without overburdening your budget.
What alternatives are there to loan repayment insurance?
Cheaper and often more comprehensive alternatives are term life insurance to cover the event of death and disability insurance to protect your ability to work. These usually offer more extensive cover on better terms.
