The forward loan is a loan type of annuity loan. With such a loan, the amount of the installments remains constant over the course of time. The installments consist of the two components of the interest component and the repayment component. Since the amount to be repaid is very high at the beginning of the loan repayment, very high absolute interest initially arises with a constant interest rate. The first installment is therefore composed almost equally of a repayment installment and an interest payment.
As the absolute amount of interest becomes lower as the repayment progresses, the repayment amount can be increased each time in order to arrive at a consistently high sum of the respective installment. At the end of the repayment of such an annuity loan, the repayment balance is very low, which is why there is no longer a high interest amount. Thus, the last installment can consist almost entirely of the repayment debt, while the interest amount is close to zero.
Securing favorable interest rates
One problem in the financial world is that interest rates fluctuate enormously in some cases. If you want to take out a loan at a later date, you will often face the problem that interest rates will be higher than they are currently. The alternative would be to take out the loan earlier than you need it or to be able to pay the installments back.
The forward loan solves this problem in a very elegant way. It is possible to conclude the contract early and to secure the current interest rate when concluding the contract. However, the loan is not paid out immediately, but only after a delay, also contractually agreed. For some banks, this can be up to 5 years. From this fact, the name is ultimately derived, which can be translated as a forward loan or loan in advance. The forward loan is usually taken out for large-scale projects, such as building a house.
A risk to the credit institution
Since the development of interest rates is unpredictable, the forward loan represents a certain risk for every credit institution. In order that this risk does not become too great, they pass some of it on to the customer. This is done by contractually setting a fixed interest rate, but this is a slightly higher interest rate than would be the case with a loan that would be paid out immediately. This results in predictable but automatically higher costs for the customer.
There is also a certain risk for the customer. Particularly unlikely given current economic developments, but it cannot be completely ruled out that the future interest rate at the time the loan will be paid out will be lower than the contractually specified interest rate, including the risk premium. The level of the risk premium is estimated by credit institutions on the basis of the current economic development and increased over a longer forward period.
Cost reduction through non-acceptance compensation from the credit institution
The higher interest rate for a forward loan in 2015 was 0.58% above the interest rate applicable at the time. Since the economic development is unpredictable over long periods, it can happen in special cases that the interest rates fall very sharply and the forward loan is no longer worthwhile for the customer. In such a case, he has the option to withdraw from the contract, but must pay the credit institution a non-acceptance fee.
Basically, this is nothing more than compensation for breach of contract. Ultimately, it can happen that the interest rates on the loan payment date fall so far that the interest rate of a spontaneously taken out loan plus the non-payment fee is still worthwhile. The amount of the compensation is usually calculated according to the rules of prepayment penalty, but if the interest fluctuates strongly when the contract is concluded, a flat rate for non-acceptance compensation, which is also contractually agreed, is worthwhile.