To finance a larger purchase, such as an apartment or a house, you take out a classic installment loan, which you then pay out in monthly installments. But there are other forms of long-term funding that do not have repayments made during the loan term. This type of financing is known as a maturity loan, a fixed loan or a maturity loan.
The final loan – definition of the term
With a maturity loan, the borrower only counts down the loan amount at the end of the loan term. This form of financing is therefore repayment-free, only the loan interest is payable monthly over the entire term. This means that if, for example, you took out a loan amount of 3,000 USD with a term of 2 years with 3% interest, you will pay back the 3% interest monthly within 2 years, and only at the end – the actual loan amount of 3,000 USD.
When is the final loan used?
Final loan is not useful for every customer and is only recommended in certain cases. As a rule, the maturity loan is drawn when the money is available, but will only be available at a later date. It can happen if a payment from a capital or pension insurance is expected. The amount raised can also be financed from other special income.
As a rule, the fixed loan is used when buying property, since the apartment can be rented later and the interest on the maturity loan is tax-deductible.
If you opt for a maturity loan, you no longer need to cancel contracts, building society contracts, investments or insurance policies, especially if additional costs can be incurred if the loan is canceled early.
Advantages and disadvantages of a fixed loan
A maturity loan has the following main advantages:
- The borrower is financially low because only the interest has to be paid over the term
- The customer’s financial situation is flexible, as he can plan other investments by the due date
- The interest can be fixed or variable, which can be regulated by contract
- Interest on the fixed loan can be covered by the rent
The disadvantages of a final loan are:
- Since a fixed loan is always associated with a risk, banks almost always pay higher interest than an annuity loan
- Only certain investment products are suitable for repayment of a maturity loan – the borrower should have certain knowledge of this
- The return on the intended repayment vehicle is sometimes difficult to predict
Conclusion: A maturity loan only makes sense for certain purposes, such as building finance or property purchase. If you want to decide on a final loan, you have to carefully consider all advantages and disadvantages in advance.