Consumer loans (also called consumer credits) usually refer to small loans or consumer credits. This is not restrictive, however, because depending on the lending institution it can mean any loans granted to private individuals. A legal regulation exists with the Verbraucherrichtlinie, which applies to loans up to €75,000.
Consumer credit usually refers to loans for smaller amounts that are taken out in connection with the purchase of a good. Typical examples are furniture and expensive electronic items. Retailers often work with a bank to make processing as convenient as possible for the customer. These offers often come with comparatively very low interest rates. Financing at 0 percent is also not uncommon. Repayment of the loan amount usually takes place in instalments composed of interest and principal. This is also referred to as debt service.
Consumer loans are best distinguished with regard to contracting parties and the type of repayment. A typical dealer credit is often arranged without a bank and in the form of a deferred payment. Customers then usually have 30 days to pay the outstanding amount. Until that time, a retention of title applies. That means the retailer remains the legal owner of the goods until full payment has been made. The situation is a little different when a bank is involved in the transaction. In that case a loan agreement is concluded with the bank, the amount is paid out to the retailer and the repayment modalities are agreed. Repayment is usually made in the form of instalments. For consumer loans, terms are usually between six months and two years, depending on the purchased good.
A relatively new variant of the consumer loan is the line of credit. In terms of how it is handled, it is roughly halfway between an overdraft facility and an instalment loan. With a line of credit a certain credit limit is set, within which customers can draw amounts of varying sizes as needed. Repayment is similarly flexible as with an overdraft. The bank only requires a minimum instalment, which usually corresponds to a percentage share of 2–5 percent. In terms of price, the line of credit is therefore one of the particularly attractive offers, as it is significantly cheaper than an overdraft and, despite its very high flexibility, only slightly more expensive than a normal instalment loan.
An overdraft can also be used as a consumer loan, but customers should make sure to repay the amounts as quickly as possible because of the comparatively high interest rates. Overdrafts are primarily intended to bridge short-term financial bottlenecks, not for medium- to long-term financing of consumer goods.
What requirements are decisive for an application?
In principle, the term and instalment amount are particularly important when granting consumer loans. Both are also directly related to each other. And this can be easily explained: the longer the term, the lower the instalments. After all, the customer has more time to spread the loan amount. However, it should be noted that the longer the term, the higher the interest costs. The longer the lender has to wait for their money, the higher they will charge for it. On the other hand, instalment payments should always be in line with your household budget. That is also the reason why lending institutions always carry out a creditworthiness check. For some customers this may be annoying, especially since a loan application can be rejected if creditworthiness is poor. But ultimately this only serves to protect both the lender and the borrower.
To be on the safe side, as a customer or borrower you should know your monthly expenses and income. Only in this way can you find out which instalments are sustainable month to month without having to accept a loss in quality of life or financial bottlenecks. If lenders are not sure about granting a loan, they can also demand additional collateral. For small consumer loans this is usually not necessary. In addition, a guarantor can be called in. Of course, the guarantor should meet the necessary requirements so that they can step in if the borrower falls into arrears.
Nominal and effective interest rates
For every consumer loan two interest rates are always quoted: nominal and effective interest rates. The nominal interest rate is, strictly speaking, the actual price for a loan. Its level is determined by reference interest rates such as EURIBOR and LIBOR. In addition, the offerings of other banks also play an important role in pricing. However, the effective interest rate, often called the annual percentage rate (APR) in many offers, is more suitable for comparing loans.
The APR includes all cost-relevant factors that affect the consumer loan and its conclusion. These include, for example, term, instalment amount and processing fees. The advantage now is that loan offers from different banks can be compared much better in this way. Both the nominal and the effective interest rate must always be stated with every offer in accordance with the Preisangabenverordnung.
It is also typical for consumer loans that they are usually granted with a fixed interest rate. This means that the interest rate agreed at the start of the contract does not change over the entire term. This offers customers the advantage of secure budgeting, because with a constant interest rate the instalments do not change either. Of course there are also offers with a variable interest rate, which can be significantly cheaper depending on the current market situation. However, there is always the risk that interest rates will rise again. For loans with very short terms this risk is, however, limited.
Where can consumer loans be applied for?
Instalment loans in the sense of consumer loans are available at almost every lending institution. Those who prefer a particularly fast application process will find what they are looking for with direct banks or online credit brokers. These specialize in concluding contracts over the Internet and usually also offer a cost advantage. In contrast, customers can also receive personal advice at a branch bank and bring all the necessary documents and paperwork required for the application (for example, bank statements and proof of income) with them and have them checked on site.
At credit brokers such as Maxda Kreditvermittlungs-GmbH, this advice is provided by telephone.