Banks give final loans to both private and corporate customers. This special form of credit is characterized by a special repayment agreement, which is very suitable for some financing purposes.
Terms for final loans
Term loans do not differ from other forms of credit in terms of the customer’s credit check prior to the loan approval. The bank only approves the loan application once the creditworthiness has been confirmed after the test procedure has been completed.
The interest rate on a final loan is fixed throughout the term. This is regulated in the same way as for installment loans. Final loans differ from other forms of loan solely in terms of their repayment modalities. While installment loans are continuously repaid over the entire term by using part of the annuity to repay the loan, this is fundamentally not the case with term loans. Here, the total loan amount remains unchanged during the term of the contract. That is why the loan amount always pays full interest, so that the monthly interest is always the same amount.
In the case of an installment loan, on the other hand, the loan amount is permanently reduced due to the repayments made, so that the interest payable is reduced accordingly. A final loan is only repaid in large amounts at the end of the term.
Final credit risks
This form of loan is associated with particularly high risks for lending banks. Because until the end of the loan term, the entire loan receivable remains in full, while with an installment loan it is continuously reduced by the ongoing repayments. For this reason, credit institutions particularly often require the deposit of collateral for final loans.
If the borrower is unable to meet his obligation to repay the loan amount at the end of the loan contract, the bank realizes the security. For customers, a final loan always entails a higher interest charge than an installment loan. By completely foregoing repayments during the term, interest payments must always be made that relate to the total loan amount. As a result, a loan with a final installment is much more expensive than an installment loan.
Final loans for private customers
In the retail customer area, term loans are far less popular than installment loans. Many consumers feel that the risk is too great that they will not be able to make the repayment at the end of the term. In addition, the high amount of interest makes this type of loan unattractive, especially for customers who are able to provide ongoing repayments.
However, maturing loans, the repayment of which is secured by the simultaneous taking out of a capital-building life insurance, are definitely in demand. Here, the repayment is saved in the form of monthly contributions to life insurance. If both life insurance and the loan fall due after the expiry of both contracts, the sum insured will be used to repay the final loan.
Who is the final loan suitable for?
However, this condition design is only suitable for customers who pass the health check for taking out life insurance due to their good general physical condition and age. In the form of official loans, which are paid out for free use, this type of final loan in combination with life insurance is relatively widespread.
This combination of life insurance and final loan offers both the borrower and the lender a particularly high level of security. This hedge has proven its worth, particularly for long-term loans. If the borrower dies before the end of the contract term, his heirs pay back the loan with the amount insured.
The car loan
Car loans are also paid out in the form of final loans to private customers. This also enables customers with limited financial resources to buy relatively high-quality vehicles.
However, the prerequisite for unproblematic processing of this form of credit is that the customer will have higher income or sufficient assets in the future to be able to reliably pay the final installment. This is often the case, for example, with young car buyers who take up their first job after completing their training or university studies and can expect to see their salaries rise soon.
Final loans for corporate customers
Companies in the start-up phase often opt for final loans. In this way, the capital requirements that they have due to the expenses required to start up the business are met. At the same time, the repayment suspension gives them financial scope until the end of the loan term.
At the very beginning of business, many companies find it difficult to generate a sufficient amount of continuous cash flow that would enable them to reliably repay an installment loan.
However, granting such a final loan to newly founded companies leads to a particularly high risk for the lending bank. If the company went bankrupt during the first few years, the bank would have to write off the entire loan amount. In order to protect themselves from this danger, many credit institutions therefore require that the owners personally provide collateral. For corporations, this usually takes the form of a guarantee from the business owner.
The transfer of ownership by way of security of motor vehicles or high-quality machines is also quite common in this context. But even companies that have been operating successfully on the market for a long time often ask for final loans. This can be necessary, for example, to finance long-term and costly orders, but also for the purchase of capital goods with a particularly long payback period.