A loan with a final installment is mostly used for a car loan, although this is not uncommon even with a normal installment loan. Here, a loan amount with a term is agreed between the borrower and the lender. However, this loan amount is not divided over the entire term as usual, but only included in the term financing to a previously agreed part.
The difference between the installments paid and the entire financing is then repaid at the end of the loan term at the last installment, the so-called final installment. There are two major advantages for the borrower, because on the one hand the burden of the installments in the months before the last installment is of course lower, on the other hand the interest rate is effectively reduced because it only applies to the previously paid installments but will count towards the final installment.
A loan with a final installment is a common financing model in banking, but this is mainly used when the loan is used to make an understandable investment. From the bank’s point of view, this primarily has security reasons that are intended to ensure that the loan or the last installment can also be repaid in full.
A loan with a final installment therefore usually requires that the bank have an attachable item, such as a car, in an emergency, which can be collected in the event of a default. Since the final installment is much higher than the previous monthly installments, lenders want to ensure that the loan can still be repaid in full. As a borrower, you have to be aware that in the last month of the loan agreement your own financial position will be burdened with a not inconsiderably greater amount than before.
But if you are sure that your own financial possibilities can also handle a higher final installment or if you are already wisely planning to save money for this installment, you can save considerably on the interest accrued. Therefore, a loan with a final installment is usually only allowed if there is a fixed and ideally long-term employment relationship, so that the lender has no fear of sudden termination and therefore a loss of payment.