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Loan period – time from making available

The term of the loan is the time from the borrower’s availability of the funds available to the borrower until the borrower returns the entire amount together with the interest payable to the lender.

The length of the loan period

The length of the loan period

Banks set different loan lengths, depending on the type of product. It was assumed that in the Polish banking law the loan periods were determined as follows:

Cash loans:

  • from 3-6 months to about 8-10 years .

Mortgages

  • minimum period of about 5 years to 35 years .

After 2014, significant changes occurred in the dating of mortgage loans. Currently, they are only 35 years old, the causes of the borrower’s age when approaching the end of the payment of installments can not exceed the limit of 80 years. For this reason, a person aged 60 years will receive a loan for a maximum period of 15 years. Previously, loans were granted even up to the 50s, which implied a number of serious consequences for creditors.

Influence of the loan duration on the amount of installments and loan interest

Influence of the loan duration on the amount of installments and loan interest

If the loan period is longer, it allows you to have a smaller monthly installment and spread the debt over a certain time horizon. What are the benefits for the borrower for this? Well, very positive. First of all, the monthly installment does not burden his household budget, while job loss or temporary financial complications are not able to disrupt the regular repayment of the installment. Unfortunately, longer lending has one basic disadvantage. The longer we repay installments, the more interest rates are increased by the bank (calculated by the bank). This, of course, increases the overall cost of crediting. However, if our loan is for a very large amount, it is not worth deciding on a very high monthly installment, because we can fall into a financial trap and lose the ability to pay any loan installments at all.

For example, simulation of credit costs with an interest rate for a loan in the amount of PLN 300,000, with an interest rate of 5% per annum (fixed), a loan period of 20 years, a second loan period extended by an additional 10 years.

Tab. 1. Comparison of loan costs (interest amount) in a loan for a period of 20 and 30 years.

Loan period

 

Monthly installment

 

Interest

 

Twenty years

1980 PLN

PLN 100,000

30 years

PLN 1610

PLN 175. 000

 

The above table shows that a person who takes out a loan for more than 20 years will have to pay the bank an additional PLN 75,000 due to interest on crediting. A person who chose larger installments and a shorter loan period will save that amount.