Consumer loans
Consumer loans (also called consumer credit) usually refer to small loans or personal loans. However, this is not restrictive, as depending on the lending institution it can mean any loans granted to private individuals. There is a legal regulation in the Verbraucherrichtlinie, which applies to loans up to €75,000. Consumer credit usually describes loans for smaller amounts that are taken out in the context of purchasing a good. Typical examples are furniture and expensive electrical appliances. Retailers often cooperate with a bank to make processing as convenient as possible for the customer. These offers often include comparatively very low interest rates. Financing with 0 percent interest 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.
Various types of consumer loans
Consumer loans are best differentiated by the contracting parties and the method of repayment. A typical dealer credit is often arranged without a bank and in the form of a deferred payment. Customers usually then have 30 days to pay the outstanding amount. Until that time the reservation of title applies. That means the retailer remains the legal owner of the goods until they are paid for in full. Things are a little different when a bank is involved. In that case, a loan agreement is concluded with the bank, the amount is paid out to the retailer and the repayment terms are agreed. Repayment is usually made in the form of instalments. For consumer loans, terms typically range between six months and two years, depending on the purchased item.
A relatively new variant of the consumer loan is the credit line (Rahmenkredit). In terms of processing, it is halfway between an overdraft facility and an instalment loan. With a credit line, a certain credit limit is set within which customers can draw amounts of varying size as needed. Repayment is similarly flexible to an overdraft; the bank only requires a minimum instalment, which usually corresponds to a percentage share of 2–5 percent. In terms of cost, the credit line is therefore particularly attractive, as it is significantly cheaper than an overdraft and, despite its high flexibility, only slightly more expensive than a normal instalment loan.
An overdraft facility (Dispokredit) can also be used as a consumer loan, but customers should ensure that amounts are repaid as quickly as possible because of the comparatively high interest rates. Overdrafts are primarily intended for short-term bridging of financial bottlenecks, not for medium- to long-term financing of consumer goods.
Which requirements are decisive for applying?
In principle, the term and the instalment amount are particularly important when granting consumer loans. Both are also directly related to each other. This can be easily explained: the longer the term, the lower the instalments. After all, the borrower has more time over which the loan amount can be spread. 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 more they will charge for it. On the other hand, instalment payments should always be in line with one's 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 can be refused in the case of poor creditworthiness. Ultimately, however, 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 bearable month by month without losing quality of life or running into financial difficulties. If lenders are not sure about granting a loan, they can also require additional collateral. For consumer loans with small amounts this is usually not necessary. In addition, a guarantor can be brought in. The guarantor should, of course, meet the necessary requirements so that they can step in if the borrower falls into arrears with their payments.
Nominal interest rate and APR
For every consumer loan two interest rates are always quoted: the nominal interest rate (Sollzins) and the effective interest rate (Effektivzins). The nominal rate is, strictly speaking, the actual price for a loan. Its level is determined by reference interest rates such as EURIBOR and LIBOR. Offers from other banks also play an important role in pricing. To compare loans, however, the effective interest rate—often also called the annual percentage rate (APR)—is more suitable.
The APR includes all cost-relevant factors related to the consumer loan and its conclusion. These include, for example, the term, the instalment amount and processing fees. The advantage is that loan offers from different banks can be compared much more easily in this way. Both the nominal rate and the APR must always be stated for every offer in accordance with the Price Indication Regulation.
A typical feature of consumer loans is also the type of interest. In general, loans are 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 reliable budget planning, since the instalments do not change due to a constant interest rate. Of course, there are also offers with variable interest rates, which can in some circumstances and depending on the current market situation be significantly cheaper. However, there is always the risk that interest rates will rise again. For loans with a very short term, this risk is, however, limited.
Where can consumer loans be applied for?
Instalment consumer loans are available at almost every lending institution. Those who prefer a particularly fast application process will find what they are looking for at direct banks or online credit intermediaries. These specialise in concluding contracts over the Internet and usually also offer a cost advantage. In contrast, customers can receive personal advice at a branch bank and bring all the necessary documents required for the application (for example account statements and payslips) with them to check on site.
For credit brokers such as the Maxda Kreditvermittlungs-GmbH, this advice is provided by telephone.