Credit cost trap – Prevent hidden costs in the loan

Consumers usually take out loans when major purchases are made. This is understandable, because who has enough money to finance a new car or even a house at once? However, due to carelessness, many consumers fall into a credit cost trap. You can find out how to avoid this and identify hidden costs in the loan in the following article.


The trick with the variable interest rates

interest rates

This is probably the biggest credit cost trap that countless consumers fall for. If you search for cheap loans on a comparison portal, you will inevitably come across offers that promise effective annual interest rates of less than 1 percent. Comparison portals arrange the offers according to the amount of interest, so that the relevant loans land at the top. They are happy about the apparently cheap loan and make the loan application. Only then will you notice the cost trap for the loan because the interest is no longer so cheap. Instead of less than 1 percent, the bank suddenly demands 7, 8 or even 10 percent. This is completely legal because the interest rate on these loans depends on the customer’s credit rating. The promised low interest rate is only received by selected customers with a very good credit rating, such as civil servants. Most consumers have to pay significantly higher interest rates. As a small print note, under the offer in the loan comparison, you will find the sentence: “Two-thirds of all customers pay XY percent interest.” This is the realistic value that you should assume when comparing loans.


How can variable interest rates be avoided as hidden costs in the loan?

Instead of formally applying for a loan, you’d better make a condition request to the bank. That means you ask what the interest would be if you applied for a loan. This is how you get this info without the loan application being registered in your Schufa.

Alternatively, you can also opt for a loan with a fixed interest rate that is independent of creditworthiness. However, this is only offered by a few banks. Incidentally, the interest on a loan averages just under 5 percent. Most consumers would drive better with a fixed rate. There are also no hidden costs for the loan.


The term as a cost trap for a loan

loan trap

The usual terms for a private installment loan are between 12 and 84 months. Only a few banks offer longer terms, for example up to 120 months or even 180 months. Due to a lack of experience, many consumers opt for a long term because this reduces the monthly rate. Without knowing it, they fall into a credit cost trap. A longer term increases the cost of the loan because you have to pay interest over a longer period of time. The credit comparison offers show you the total cost of the loan at the bottom. With a large loan amount and a long term, that’s quickly a few hundred euros more. Nevertheless, with a high loan amount, it may make sense to accept a long term in order to get the monthly installments as far as possible. This is often very individual, depending on the life situation.


How can you prevent the term as hidden costs in the loan?

How can you prevent the term as hidden costs in the loan?

Choose the term so that you can pay the installments without effort. It is essential to avoid delaying repayment unnecessarily. Instead, do everything in your power to pay off the loan as soon as possible.

Almost everyone who has a checking account is given a overdraft facility by their bank. It is not uncommon for the bank to appear to be generous and to grant an overdraft facility in the amount of two or three months’ earnings. The cost trap for the loan snaps at the latest when a quarter is over and interest is due. As a rule, the overdraft facility is the most expensive loan. Even now, in times of low interest rates, the bank often charges 11-12 percent or even higher interest rates on the overdraft facility.


How can you avoid expensive overdraft interest?

How can you avoid expensive overdraft interest?

If possible, try to get by without an overdraft facility. If you have already used up your overdraft facility a lot, talk to the bank and ask them to gradually reduce it until you reach an amount you can live with. Alternatively, you can reschedule the overdraft facility.

This is a particularly insidious cost trap for a loan because it only comes into effect long after the loan agreement has been signed. The prepayment penalty is a penalty fee that you have to pay if you redeem (pay off) the loan early, for example through a debt rescheduling. The bank justifies this with lost profit. Depending on the bank, 1 – 3 percent of the outstanding loan amount is calculated as prepayment penalty.


How can the prepayment penalty be avoided?

How can the prepayment penalty be avoided?

There is basically nothing you can do about it. If there is a corresponding clause in the loan agreement, you will have to pay the fee for a debt rescheduling. Calculate the costs and add them to the debt restructuring costs. So before signing the contract, make sure that your loan contract does not include prepayment penalty!