Borrower
In banking and lending, the term borrower refers to natural persons or bodies of private or public law who take out loans from a lender. By submitting a loan application, they enter into a loan agreement with the lender and commit to repaying the provided loan amount plus a contractually agreed interest rate within a likewise agreed period.
In practice, the banking sector usually distinguishes between attractive and less attractive borrowers, and there are even cases of high-risk customers. Which type of borrower applies depends on several factors — for example whether there are Schufa entries, whether there are already outstanding or ongoing loans, and how high the monthly or annual income is.
Nevertheless, there are so many different forms and types of loans today that virtually every borrower can find a suitable lender and contract. What matters more is how favorable and advantageous the terms of the offer are. Lenders and financial institutions usually pass on higher lending risk to the borrower. For example, through additional insurance (in case of inability to pay or unemployment) or by charging higher interest rates.
Different types of borrowers
Overall, there are two forms of credit:
- a written credit, where the borrower, for example at a credit institution such as a bank, submits and signs a written loan application.
- On the other hand, there is the case of a temporary and implied credit. This applies, for example, when the current account is overdrawn within the scope of a previously agreed overdraft.
Other subtypes of credit include credit cards, which provide an overall credit limit that can be used at will. In all cases there is, however, a contractual agreement in which the borrower undertakes to repay the loan or credit under agreed conditions.
The contract regulates the conditions under which the creditor agrees to grant the loan amount requested by the borrower. The contract therefore contains agreements on the type of credit, the loan amount, the term of the loan, loan securities and the interest. Concluding a loan agreement, as with all contracts, requires that both parties are legally competent to enter into transactions.
Consumer contract and joint loan
There are deviations, for example, in the so-called consumer credit agreement or in the case of a joint loan. A consumer loan agreement can be concluded with a consumer only in written form. For all other types of credit, such as the electronic form or any other non-written forms, the lack of form leads to invalidity. This has been decided in order to protect the consumer.
By the way, a proper loan agreement must include at least the amount of the loan, the agreed loan duration or term, the agreed annual percentage rate and any subsequent costs. If one of these points is missing, the contract is also void.
A co-borrower (Mitdarlehensnehmer) is referred to when not one but two borrowers conclude a joint loan agreement. This person is not merely a guarantor providing security: a co-borrower has full rights of participation and full entitlement to the loan amount. At the same time, they also bear all the obligations of a borrower.
Legal entities as borrowers
Another form of borrower is when they are not subject to the consumer protection clause of the BGB. This is the case, for example, with legal entities such as companies, firms or public-law entities acting as the borrowing party. For loan agreements, the unrestricted freedom of contract under the law of obligations (according to the BGB) applies.
However, there are also special exceptions, for example when consumers act as co-debtors, guarantors or co-borrowers. Here consumer protection law comes into effect again, which is why credit institutions (e.g., banks) often clarify the relationship between the consumer and the non-consumer in corresponding loan inquiries.
The borrower and their role for credit and financial institutions
For banks, financial institutions and banking supervision, the terms loan and borrower are important not only because lending and the associated flow of money generate many core revenues.
The terms loan and borrower also bring a number of reporting and supervisory law consequences. Not only is the distinction between consumer and non-consumer of immense importance here, but it is also the lender who bears the supervisory duty. Ultimately, the lender is the one who suffers the consequences and is left behind if, due to incorrect information or assumptions, the previously concluded loan agreement becomes void.
The situation is different, of course, if the borrower knowingly withholds key information. However, the Bundesgesetzbuch also states that a credit institution must consider the possible ignorance of the customer. In many cases, therefore, much of the risk lies with the lenders.
Of course, not every risk case is the same, which is not always taken into account in individual cases. The law covers many areas broadly, which in numerous cases represents an advantage for the borrower. This results not only in the large variety of loan types and offers, but also in the number of lenders and creditors who have chosen a particular focus.
Thus, in the broad market there are lenders who grant exclusively high-risk loans (without Schufa checks or proof of income to obtain a credit reference), just as there are financial institutions that offer very lucrative loan offers. These offers, however, tend to be reserved for so-called attractive borrowers.
The borrower and their overarching rights and obligations
The borrower, whether consumer or non-consumer, primarily commits to repaying the loan amount on the agreed and specified dates. Possible default interest and similar charges are also contractually agreed in advance. These are usually found in the small print of the contract. The repayment obligation also includes the interest charges that must be paid.
In addition, except in some risk and special loan types, the borrower usually agrees to an optional disclosure of their financial circumstances, which the lender may request at any time during the entire term of the loan agreement.
The borrower also assumes further ancillary obligations: for example, a continuous duty to inform the lender if there are economic or legal changes. Legally, however, this duty is limited to changes that could affect the loan relationship.
Examples of such a notification obligation would therefore be unemployment or a drastic deterioration in asset or income conditions.
Not all obligations are set out in the contract; many are contained in the terms and conditions — nevertheless, these are usually agreed to by a clause included in the contract. Therefore, one should carefully study the lender's terms and conditions (AGBs) before signing. The loan agreement does not consist only of obligations for the customer, which they should always fulfill conscientiously. The borrower also has a number of rights, which mainly relate to the right to repayment or release of the provided securities at the time the loan agreement is concluded, once the remaining debt has been fully and successfully paid off.