Reasons & regulations for permanent employment contracts
While fixed-term employment contracts were once mainly common in sports and among employed artists, they are now common in an increasing number of industries. Companies thereby extend the decision period before committing permanently to an employee beyond the probationary period. At the same time, they can part ways with employees in times of poor order volume without having to carry the stigma of a dismissal for operational reasons.
For the employee, a fixed-term employment contract means that they have no security of being taken on after the agreed term. At the same time, an ordinary termination by the employee during the fixed term is generally not possible. Fixed-term contracts may be agreed for a maximum of two years without a special objective reason, after which the employment contract automatically converts into a permanent employment relationship if neither the employer nor the employee ends it upon expiration of the last term. An exception applies when hiring employees at a minimum age of fifty-two, if they were previously unemployed for at least four years. In this exceptional case, the fixed-term employment may last five years. For fixed-term contracts for objective reasons the legislator does not set binding time limits. Most objectively justified fixed-term contracts concern cases of illness as well as maternity and parental leave cover. When hiring for a specific project, the duration of the fixed term can exceed two years.
A loan is possible even with a fixed-term employment contract
A desired loan and a fixed-term employment contract do not necessarily rule each other out. Borrowing is easiest with a temporarily secure employment relationship when the loan can be repaid within the term. In this case the borrower has a secure job until repayment, so that no increased default risk exists for the lender. Repayment within the fixed term is most likely for small loan amounts and for fixed-term contracts concluded for the long term due to a specific project.
In both cases the loan security is higher compared with a loan to employees with permanent positions, since those can be terminated for various reasons. With a very well-paid fixed-term contract, some banks will approve the loan without further ado even for the duration of the fixed term plus one year, because the unemployment benefit I that may follow the end of employment could be sufficient for living expenses and loan repayment. Joint loan applications by couples are in most cases possible without restriction if at least one of the two borrowers has a permanent employment contract, so that the other may be employed on a fixed-term basis.
Fixed-term status not evident from documents - loan possible
That the borrower only has a fixed-term employment contract does not necessarily become apparent from the customary loan documents to be submitted. For many lenders the submission of the last three pay slips is sufficient, on which only a few companies publish the status of the employment contract. Thus, the fixed-term nature of the employment relationship only appears from the employment contract, so it only becomes known to a lending bank if it requires submission of the contract or asks about the status of the employment relationship. The question on the loan application whether the current employment relationship is subject to a fixed term must be answered honestly by every borrower, even if the bank does not request a copy of the contract.
Loan only with secured repayment
If the relevant question is not asked on the loan application, the borrower does not have to point out the fixed-term nature of the employment contract on their own initiative. However, they are obliged to take out only loans whose repayment they themselves consider secure. Therefore it makes sense to conclude a loan contract with the option of free special repayments, which the fixed-term employed worker uses as often as possible during the term of the current employment contract so that the loan is as far as possible repaid by the end of the fixed term. Some providers grant smaller loans not only without submitting the employment contract, but even without submitting a proof of income. The waiver of documents does not mean that the corresponding statements become superfluous. These must still be answered honestly by the loan applicant in every case. If consumers take out a loan with a fixed-term contract and conceal the fixed term from the bank despite being asked, they must expect a loan termination if their false statements are discovered.
Unlike an installment loan, bank customers with fixed-term employment contracts are usually granted an overdraft facility. Most financial institutions approve an overdraft for the current account after six months of account handling with regular incoming payments, without requesting further loan collateral. The customer pays for the simplified borrowing with an overdraft, however, with significantly higher interest rates compared with installment loans.
Depending on the lender, a simplified income check may be performed when applying for a credit card, which sometimes consists only of asking about the monthly income and any property ownership. Thus employees with fixed-term contracts can make use of a modest credit limit on the credit card account; the type of employment relationship is only queried by the card issuers when the cardholder requests an increase of their credit limit.
When taking out a loan via platforms for peer-to-peer lending, the applicant discloses their project as well as their employment and income situation in the loan application, while borrowers and lenders remain anonymous thanks to processing by the platform operator. The actual credit decisions are made by members registered as lenders. Since many of them consciously provide loans to people who have difficulty obtaining credit from traditional banks, employees with fixed-term contracts have good chances of a successful loan application.
Purchasing from a mail-order company or a brick-and-mortar store with the agreement of installment payments also constitutes a form of borrowing. This is almost always possible despite a fixed-term employment contract, as many retailers depending on the invoice amount completely forego requiring proof of income or are satisfied with submission of the latest pay slip.
Whether banks grant particularly secured loans such as a mortgage or a car loan to applicants with fixed-term employment contracts depends on the lending policies of the respective institution. Given the additional loan security provided by a land charge (Grundschuld) or the conditional pledge of the financed vehicle, the chances of loan approval are good. For dealership financing it should be added that the dealer as well as the bank associated with the vehicle manufacturer have an economic interest in the sale of the car. In many cases no verification of the employment relationship takes place if a car buyer pays twenty-five to thirty percent of the purchase price as a down payment.
Another alternative for borrowing during the fixed term of an employment contract is pledging a pension insurance or a life insurance policy. However, this option does not exist for funded contracts such as the Rürup-Rente or the Riester-Rente, since their pledging leads to the retroactive loss of any state subsidies already received.