Advantages and Disadvantages of Loans

Advantages of a loan

Advantages of a loan

A loan makes the borrower liquid in the short term. He can make an investment or fulfill a purchase request. Take the example of buying a car:

The seller would like to have 25,000 USD for the vehicle. However, if the car can be paid for in cash, he gives a discount of ten percent on the sales price. This discount is at least 2,500 USD. If a loan of $ 20,000 is taken out, only the remaining $ 2,500 need to be covered by equity. At an interest rate of five percent, approximately $ 1,500 interest is due if the term of the loan is three years and the monthly installment is set at around $ 600.

This results in the following calculation:
Purchase price: 22,500 USD
Credit: 20,000 USD
Interest rate: 5 percent
Equity: 2,500 USD
Monthly rate: 600 USD
Duration: 36 months
Repayment amount: 21,600 USD
Total amount to be raised: 24,100 USD
Saving: 900 USD

The buyer saves 900 USD compared to the original price if he pays the vehicle in cash. The prerequisite for this calculation example, however, is that the aforementioned $ 2,500 equity is raised and that the borrower’s creditworthiness is good. If the creditworthiness is poor, the credit conditions are usually less favorable, which means that the interest rate increases or a lower loan amount is granted.

However, loans can also be advantageous if they are intended to replace existing loans. If these were taken up at times of high interest rates, rescheduling may result in savings of several thousand USD – depending on the amount of the loan and the term as well as the interest rate.

A loan can also be taken out if this money can be declared as equity.

A loan can also be taken out if this money can be declared as equity.

There are certain promotional loans from KfW that can be used as equity when disbursed. This improves the creditworthiness of the borrower, who in turn can score with another bank with high collateral.
Here is an overview of the advantages of a loan:

  • immediate financing of a purchase or investment request
  • Use of discounts and discounts possible
  • Improvement in equity
  • Debt restructuring possible
  • Larger purchase projects can be financed
  • Temporary financing possible with a low monthly charge

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