Even if the two terms “credit” and “loan” are used interchangeably in everyday language, there are considerable differences in their semantic meaning. Thus, the loan usually plays a more important role in real estate and construction finance. A loan is usually a long-term bond that is realized in larger amounts.
Where exactly is the difference? Overview of loans and credits
The main difference between a loan and a loan is reflected in the fact that loans are considered to be a kind of sub-category of credit. In the literature, a loan means “any form of money bond” or “the acquisition of debt”. However, when a loan is mentioned in everyday banking business, in most cases this term refers to a short or medium-term money bond that will be redeemed over a period of about five years. These are also relatively small sums of money that are borrowed. Loans, on the other hand, are characterized by higher loan amounts with a term of more than five years. Credit institutions often require collateral in the form of mortgages for loans.
Interested parties for a loan have to meet a whole range of requirements in order to receive a loan from the house bank or another credit institution.
How useful is a loan for your own home finance?
In the context of real estate and construction finance, the term loan is used instead of credit in the majority of cases. This is due to the fact that in such cases the loan amounts are quite high and the terms extend over a longer period of time. The dream of owning a property, regardless of whether it is a home or a condominium in the interior, can only be realized in the rarest of cases through savings or reserves. In such cases, building finance is usually the optimal solution. A loan is paid off over the years, but the property can be purchased directly.Because the choice of loan form binds you to the lender for years, you should carefully examine the different providers and offers and compare them with each other.It is not uncommon for the right choice to save a lot of time and money.
- running time
- fixed interest rate
- repayment ability
Which real estate or loan financing can you afford?
Future builders who are considering taking out a loan should be aware of the extent to which they can burden themselves financially. If you already keep a household book, you already have a rough idea of the scope in which you could possibly get into debt. If this is not the case, it makes sense to first make a detailed inventory that takes all important parameters into account. In this context, the calculation of the monthly income is the simpler task. The following parameters have to be considered:
- child benefit
- monthly income
- Rental or rental income
- Income from part-time jobs
Unstable or irregular earnings, such as earnings from online sales on eBay or earnings from dividends, should not be included here. Ideally, you should calculate so that you can easily repay the monthly loan installments even if this income is lost.
The calculation of monthly expenses is usually a little more complicated. This is especially true if you have little overview of your own financial situation. In order to calculate the monthly expenses, the following factors should be determined:
- monthly expenditure on food
- Ancillary rental costs (water, sewage, garbage disposal, electricity, heating)
- Leisure activities, hobbies, culture, vacation
- financial reserves
- Maintenance costs for the car
- Insurance (in this context, annual bills should be taken into account)
When calculating expenses, it is important that they are not under-calculated. One should always remember that from time to time unforeseen costs for a new cell phone, a car repair or a vacation trip can arise. Since the loan has to be paid off over many years, your own expenses should never be underestimated. Otherwise there may be financial bottlenecks that can have serious consequences.
Equity is always desirable
The more equity capital is available to finance the new property, the lower the loan and the monthly installments. At this point, however, you should act carefully, because even though it may seem tempting to invest a large part of your savings in construction finance, you should always get a certain financial reserve. Because with unexpected expenses, you still have a financial cushion. In many cases, flexibility is very low when taking out a loan. Nevertheless, greater flexibility can be agreed with the selected bank at this point. With the appropriate contractual agreements, you can avoid prepayment penalties, for example, that many banks charge for early repayment.
When should you take out a mortgage loan?
To answer the questions of what role loans play in mortgage lending and in which cases mortgage lending should be used instead of a loan, let us first consider the typical scenario for borrowing. In direct comparison to loans, loans are short-term money bonds that are paid off after a relatively short time. Interest rates on loans are often higher than loans. This is due to the fact that loans are often backed by collateral, such as mortgages.
Many prospective builders forget to include in the financing plan that costs for the interior decoration arise when building a house or buying an apartment. At first glance, equipping the new living rooms with the furniture from the old apartment may be a good solution, but in many cases it doesn’t look particularly good. A new facility is then often bought, but it can be quite expensive. However, since the entire savings have already been incorporated into the construction financing as equity for many building owners, the financing of this purchase cannot be realized. At this point it makes sense to think about taking out an installment loan.
In many cases, however, it makes much more sense to use a small portion of the equity that is earmarked for home finance to purchase the new facility. This avoids borrowing with high interest payments and a further monthly financial burden. In addition, offers from various furniture stores that advertise with an alleged zero percent financing should be enjoyed with caution. Because in many cases such zero percent interest is only guaranteed over a certain period of time.
Differences between loans and credit: the conclusion
While every loan is a loan, a loan is not automatically a loan. Loans are long-term investments that are used, for example, in construction finance. These are deposited with collateral in the form of mortgages, which ensures low interest rates. In contrast to the loan, traditional installment loans are concluded over a shorter period of up to five years. The loan amount is also lower, while interest rates are higher, since credit institutions in the case of conventional installment loans do not require collateral but require a credit rating. With Vexcash, for example, it is also possible to take out an express loan from 100 dollars up to 3000 dollars.