The Loan

With a loan, the lender provides the borrower with money or fungible goods for a limited time. These loans are often called installment loans (Ratenkredit), since the repayment of the borrowed money normally takes place in monthly installments. Consumers frequently use a loan for new purchases when the expenses for the respective purchase are higher than their current finances allow. Taking out a loan is a suitable solution in such cases.

Excluded from this are overdraft loans and securities loans, since no fixed term and no repayment mode are specified for these. Often an installment loan is interest-bearing, i.e. with a cash loan not only the nominal amount of the credit and with goods loans not only goods of the same kind as those credited must be repaid, but interest (also called the interest rate) is also charged. These interest charges affect the monthly installments.

Typical types of credit are loan agreements (Darlehensverträge), hire-purchase agreements, deferments (Stundungen) or bills of exchange. Expressions like "to have credit with someone" or "to be on good terms" also mean something positive. This economic appreciation shows that one is solvent, trustworthy and therefore creditworthy.

Guide: Loan Types

A distinction is made between private loans and bank loans. With a private loan, a private person gives another person or a company a loan. The lender may forgo the money and, as compensation for the risk taken, demand the payment of interest. No money creation takes place. The credit is therefore provided by a private lender. With a bank loan, money creation takes place through the granting of credit. Although the default/insolvency risk for the bank increases with rising lending rates, banks also require the borrower to pay interest. A very well-known form of credit is the loan (Darlehen). This is a contractually bound transfer of money or goods by the lender to the borrower by delivery of banknotes or goods or the assignment of other items.

Most parties enter into a fixed repayment agreement. If such an agreement has not been made, the repayment of the loan principal plus interest becomes due as soon as the loan has been terminated by one of the parties.

Cash loans are usually granted on the current or a separate account for a limited period of time. These loans can be used in varying amounts during the term. Apart from the overall time limit, there are no concrete repayment arrangements. If parts of the loan are not used, a time-dependent fee, sometimes called a credit commission or commitment fee, is sometimes charged in addition to the interest due.

Another form of credit is a loan restructuring (Umschuldung). For this, an old loan is closed and the remaining amount is taken over in the form of a restructured loan, usually on better terms.

Loans for Private Customers

Private customers are usually employees or private individuals who do not run a business. To make it easier for these customers to compare the various loan offers, special regulations regarding the Price Indication Ordinance or the disclosure of the effective annual interest rate apply here. The effective annual rate is the most useful for consumers who want to compare loans, because it includes all costs incurred. The nominal interest rate (Sollzins), on the other hand, only includes part of the costs and should therefore not be used to compare different conditions. A loan comparison is always advisable and should always be carried out before concluding a loan.

To take out a loan as a private customer, you must be of legal age. Some lenders also use automated creditworthiness checks based on data from existing business relationships or obtain credit information from Schufa. There are different types of loans for private customers. The line of credit (Verfügungskredit) is a form of cash loan, where the credit limit is usually determined on the basis of regular incoming payments, such as salary or pension payments. Consumer loans (Anschaffungskredite) are loans for a specific purpose of consumption. Terms of up to six years are common here. In addition to the monthly repayment installment, which covers both principal repayment and the corresponding interest payments, processing fees are generally charged. To avoid overburdening the customer financially, an appropriate burden is determined. Secured transfers of ownership of the purchased item are often used as collateral. The loan amount is credited to the current account or paid directly to the seller of the purchase item. During loan repayment, repayments may also occur that were not planned in advance. These are called special repayments and some banks may charge additional fees for such repayments.

To buy or build a property, construction financing loans are used, which are repaid over a long period of 30 years or more by annuities. Here too, securities such as mortgages or land charges on the financed property are used as collateral. Disbursement takes place according to construction progress. For such construction loans, fixed-agreed interest as well as processing fees or fees for arranging collateral are charged. Furthermore, there are so-called interim financing loans for private customers, which are bullet loans to finance home savings loans (Bauspardarlehen). Bridge financing (Vorfinanzierungen) are loans where the financing is not yet finally determined. These are also referred to as bridge loans (e.g. for business acquisitions). If securities are pledged, these are securities loans. There are fixed rules for the pledging of securities.

Before submitting a loan inquiry, you should carry out a brief financial check of yourself so that you know your options. The financial check should ideally give you an overview of how much income and expenses you have each month. After listing this information, you can best decide what loan amount and monthly installments make sense and are feasible for you. A residual debt insurance can also be taken out for an eventual emergency.

Loans for Business Customers

Since merchants are fully commercial entities, consumer protection rules do not apply here. Because larger companies sometimes have direct access to the capital market, the boundaries between credit financing and other financing are fluid.

For loans for business customers, one distinguishes, for example, investment loans (loans to finance fixed assets, e.g. a machinery park), working capital loans (cash loans to finance current assets), trade financing (cash loans that are usually short-term and due at maturity and are posted to special accounts), structured loans (in addition to the actual loan, agreements to limit future interest rates are, for example, linked), promissory note loans (the boundary to capital procurement is fluid; loans are partly provided by banks and partly by other investors), discount loans (granted for the purchase of bills of exchange). Roll-over loans are fixed-interest loans characterized by the fact that the interest is not fixed for the entire term but is adjusted to market conditions at scheduled intervals.

Loans to the Public Sector

Municipalities or state enterprises, the federal states or the state also receive loans. The best-known here are municipal loans (long-term loans to states, counties and municipalities).

Banks as Lenders

Commercial banks are often the most important lenders in German-speaking countries. They grant all forms of loans and are often operated as universal banks. In addition, specialized banks such as mortgage banks offer some of the possible loan products. Building societies (Bausparkassen) grant loans for construction financing. Other specialist banks include the Kreditanstalt für Wiederaufbau and state development institutes, which offer subsidized loans. These must, however, be applied for through commercial banks. Since these specialist banks also handle the technical processing, they receive part of the interest margin. In addition, you can also submit a loan application through loan brokers like Maxda. With reputable providers, the loan application and the assessment are free of charge. A loan inquiry is therefore possible for anyone at any time.

Central banks are the lenders for commercial banks. Central banks offer the pledging of securities and loan claims of commercial banks. The banks receive central bank money and thus cash. Life insurance companies also offer classic construction financing. These are repaid by maturing life insurance policies. These have to be saved up during the term of the loan.