What are credit banks?

In banking, credit banks refer to credit or monetary institutions that conduct financial business on a commercial basis. In other words: credit banks grant loans and advances to interested borrowers who require financing.

Often lending to private and business customers is only one of many tasks carried out by credit banks. However, there are also numerous pure lenders. But what fundamentally distinguishes these from other monetary institutions?

In Germany all credit and monetary institutions are defined by Section 1 of the Kreditwesengesetz (KWG). The term credit business is only a subsection of the broader area of banking. In everyday language credit institutions and monetary institutions are often colloquially called banks or credit banks and equated with each other — but not by lawmakers and specialists.

A strict distinction is made here between a pure credit institution and a comprehensive monetary institution. The latter often represents, for example, the house bank. As is well known, these also offer various credit options in addition to the possibilities of opening a current or savings account.

Pure credit banks differ precisely at this point, because they usually offer only loans, advances, bonds and the like. In addition, credit institutions can be divided into numerous legal forms: private-law and public-law enterprises are just two of the most common.

A common distinction is also made between direct banks and branch banks. Direct banks, in contrast to branch banks, operate without branches and therefore have no direct customer contact. There are also large banks. These were able to develop into large banks because they took over many smaller regional banks. Regional banks usually have only a few branches within a region. Branches are an additional establishment of a company (here: regional bank) and are usually assigned to a main office. The branches of a bank are centrally managed by the main office. As the name suggests, regional banks and their branches can only be found within a certain region.

Bank loans and other types of credit

Almost all loans are bank loans; the mediation of private loans, as well as borrowing from a pawnbroker, account for only a small proportion of the total loan volume.

In most cases dealer credits are also bank loans, since the dealer forwards the customer's loan request to credit banks.

True dealer credits, where the seller itself provides the financing, do exist in the form of installment agreements (/en/installment-loan), but they are rare compared to bank loans brokered by individual retailers.

In addition to credit banks, life insurers can also act as lenders; they can lend against policies taken out with them and grant building loans (mortgage financing). A building loan can be used exclusively to finance a property or construction project. Mortgage financing also covers incidental construction costs and offers favorable terms. These favorable conditions for mortgage financing are possible for the bank because the bank regards the property to be financed as collateral.

The distinction commonly made in everyday language between an internet loan and a bank loan is neither legally nor factually justified, since the granting of loans via the internet is handled by credit banks in the same way as loan applications in a bank branch.

The business of money: the history of credit banks

Looking back at the long history of the broader banking sector, it is apparent that the credit bank and the house bank were once not so dissimilar. The era of credit banks began broadly with the increasing popularity and use of money as a means of payment. This is where the first original “banks” came into play, taking on many tasks in trading coins and more.

On the one hand, they accepted valuable goods such as jewelry and cash gold to exchange them for coins. At the same time, as early as the second century AD it is documented in various countries — for example Mesopotamia — that credit-like loans were already being granted. These were of course always dependent on collateral such as land and were therefore less available to the poor than to the wealthy.

Banking reached Europe only later, in the 14th century. The first banks spread in Italy, from Florence, with an immediate focus on the poorer segments of the population. The wealthy citizens of the cities, however, nourished the banks and were rewarded with interest-like returns.

The modern form of credit was thus born in Europe. Germany took longer and established the first banks for the general public in the 18th to 19th centuries.

In Europe, banking also first took on other forms in the 19th century: reserves and savings. The first savings banks were founded and offered people a way to invest their money profitably; for example, to secure themselves in old age or for other contingencies like illness.

At the same time monetary institutions began to work with the money available, which eventually brought about a new form of credit. After all, people wanted the money they had put to work to also earn new money. At that time there were countless public-law as well as private financial institutions.

To prevent them from having free access to the deposited money, the legislator intervened and tried with the first drafts of the monetary law of 1934 to restrict bankers and private banks so that they could only use small portions of the deposited sums. The credit legislation known today was introduced in 1962. Since then it has of course been modernized, improved, and optimized several times.

Tasks of credit banks

A look at the history of banking and the related credit business quickly makes clear where the main task of a credit institution lies: it primarily exists to grant and provide credit to borrowers.

In technical terms, however, they have the economically extremely important task of intermediation. More simply put, this means that they are responsible for the functioning of money and capital flows. This broadly concerns both cash and cashless payment transactions. This means that credit institutions by far do not only have the task of simply disbursing money to borrowers.

Many other tasks run in the background of the credit business. Some examples include processing payment transactions, accepting interest-bearing deposits, supplying private and business customers with loans and advances, and handling the extensive securities and issuance business in Europe and often beyond European borders.

Credit institutions and their various types and legal forms

A credit institution, as already indicated, is by no means like any other. There are significant differences here that are most evident in the different legal forms. The reason for this is that the definition of credit banks as such has only been limited by law — there is no uniform form by which the law would prescribe a differentiation.

Therefore a credit institution can, for example, be a private-law company or be run by a legal entity under public law. The difference here is often subtle, and it often confuses and unsettles private individuals.

Broadly speaking, there are various forms of private-law companies that can be active in the credit business: sole proprietorships run by a single banker, registered cooperatives, partnerships such as the legal forms OHG, KG or GmbH & Co. KG, as well as corporations.

These in turn include joint-stock companies in the form of the European Company, partnerships limited by shares (KGaA) and also limited liability companies.

Special credit banks

Nowadays most credit institutions operate in the legal form of an institution under public law. In many cases several banks or companies join together to form a credit institution.

Examples include credit banks that were jointly founded by a car dealership and a credit or monetary institution to make it easier for the dealership's customers to finance a new car purchase. If these do well, they are sooner or later often separated from their original founding area so that customers can also apply for an installment loan from the credit banks even when not buying a car.

Comparing credit banks

The different offers from credit banks differ not only by different interest rates, but also by other loan agreements or conditions. Borrowers can easily determine the cheapest bank loan — assuming the repayment agreements remain unchanged from the initial agreement — by comparing the effective annual interest rate (/en/topics/loan-comparison).

All costs associated with taking out the loan are included in the effective annual interest rate. These include the installments that must be repaid each month, but also one-off costs such as fees. A loan default insurance, however, only needs to be included in the effective interest rate if the insurance is a prerequisite for obtaining the loan.

In addition to the effective annual interest rate, it is advisable when comparing loans to consider the loan conditions of the individual credit banks. These mainly differ with regard to the ability to change the repayment agreement if needed or desired.

The nominal interest rate is also important for the credit decision, as it is decisive for recalculation after a changed repayment agreement.

Possible costs at credit banks

• While some credit banks already charge high fees for a change in the payment period, other lenders offer a change in the repayment rate as well as a payment suspension (also called a payment holiday) once a year free of charge. Therefore borrowers should find out in advance whether a payment holiday or other change requests may incur high costs.
• Early repayment is generally permitted for private borrowers; however, credit banks may demand compensation for their loss of profit, provided the credit agreement does not entitle the borrower to fee-free early repayment.

A loan application at credit banks is sometimes sensible

The processing effort of a loan application is lower compared to a personal application in a bank branch when the prospective borrower fills out the form on the internet. Credit banks disburse money to their customers in electronic form, so loans applied for via the internet are often cheaper than loans arranged in a branch. Nevertheless, a personal visit to a bank branch can sometimes be advisable.

Even with existing negative Schufa entries, a successful loan application at German credit banks is possible. This applies especially if the entry is old and the borrower's financial situation has changed due to subsequent employment. Due to the automated processing of loan applications submitted on the internet, older Schufa entries are often rejected, while approval of the loan can be achieved in a personal conversation.

Alternatively, you then have the option of applying for a so-called loan without Schufa. A Schufa-free loan (/en/topics/instant-loan-without-schufa) is mainly offered by credit banks from Liechtenstein and Switzerland, whereby they require a significantly minimum income for lending. These loans are also suitable for borrowers who do not want their loan to be registered with Schufa.

Large range of offerings from credit banks

Today consumers face the dilemma that an oversupply exists both within Germany and among foreign providers. While this does provide the possibility to choose, it also requires a detailed examination of the individual credit banks and their loan offers and financing conditions.

While in the past the house bank was practically the only address, today there are numerous loan offers. This can lead to a feeling of disorientation, but the consumer has the advantage that a lot of information is available on the internet.

This can be a path through the jungle of the banking world if you use it. Naturally this involves greater effort, but if you want to be sure after granting the loan that you save money and get real bargains, then the effort to find the right bank for an installment loan is worthwhile.