What do private debts mean?

Payment obligations that do not arise from the commercial lending sector constitute a person's private debts.

The relationship between a lender and a private borrower has become an integral part of the modern economic system. When handled prudently, both contracting parties can benefit from private debts.

Borrowers can thus secure a financial scope for action that would otherwise be difficult to access without private debts.

How private debts can arise

Roughly every tenth adult in Germany is considered over-indebted — private debts therefore affect far more households than previously assumed. It is also expected that the number will continue to rise and that the amount of private debt per individual will increase. Essentially, debts are payment obligations that can exist in many different areas.

If the due installments can no longer be paid, or can only be covered by using an overdraft facility, this can be referred to as private over-indebtedness.

There are many different ways private debts can come about — in many cases they arise because something is purchased that one cannot afford at that moment. This can, for example, be done by ordering from a mail-order company with installment payments or by taking out a loan.

These private debts often do not stem from mere consumerism, but are frequently genuinely needed.

Private debts from car purchases and mortgage financing

A good example is the purchase of a car which is needed for the commute — without it, a job farther away might not be feasible and the person could lose their employment. Sometimes taking on private debt is unavoidable, for example if a car suddenly needs an expensive repair and one does not have the necessary capital.

A house purchase is also a common reason for taking on private debt and is generally not considered reckless, but rather an investment in the future. If one lived in a rental property instead of owning a home, one would pay rent to the landlord every month — by taking on debt for a home, one pays off ownership and after several years has built up a good pension provision for oneself and one's family.

Accordingly, many private debts do not arise pointlessly but serve an important purpose for the debtor's future.

Private debts from unforeseen events

Private debts can of course also arise from unforeseen payment demands, such as a very high repayment claim from energy companies. Due to steadily rising costs in this area and consumption for electricity and gas not always being easily apparent, the annual bill can hold an unpleasant surprise. Hardly anyone can pay several hundred or even thousand euros at once, and suddenly one owes money to an energy company. These companies often then offer installment payments to settle the claim — which, however, can again encourage higher private debts because the monthly installments are then missing from the budget.

Private debts can also arise or grow when life circumstances change suddenly. This can happen, for example, due to illness, the loss of a job, or a separation, to name a few examples. One then suffers severe financial restrictions and may no longer be able to pay the monthly car loan installments, rent, or telephone costs. From one moment to the next, one can become over-indebted because of debts.

What makes private debts problematic

A large part of the world's population has private debts and repays them in monthly installments to various creditors, which in many cases is unavoidable. However, this leads to substantial financial losses, because each creditor charges interest on the borrowed funds, thereby increasing the debtor's outstanding balance.

Depending on the original amount owed and the monthly installment, it can even happen in some cases that only the accruing interest is paid and the private debts remain at their full amount — a negative cycle that further worsens the debtor's situation. If private debts cannot be repaid for a time and one falls into arrears, a collection agency is often commissioned and ultimately legal dunning proceedings may be initiated — a legitimate right for the creditor, but one that significantly increases private debts.

In some cases, the involvement of a collection agency has even tripled private debts, making repayment extremely difficult and the debt burden continues to grow. It is by no means advisable to simply give up in the face of private debts — that only makes the situation worse. At the latest, when private debts mean there is no money left for basic living expenses and one can hardly afford food or clothing, one should begin to address debt reduction.

Repayment of private debts

What matters to the parties involved is whether the borrower can meet the contractual payment obligations within their income. In many cases, borrowers and lenders therefore agree on a relatively low installment, while allowing special repayments without additional costs.

This gives the borrower the flexible scope to repay private debts more quickly according to their means.

When concluding the loan agreement, additional protection for unexpected life situations that affect the borrower's income is often arranged. These residual debt insurance policies cover emergencies ranging from unemployment to illness and even unexpected death, depending on the terms.

This gives the borrower the certainty that they will not be additionally burdened by private debts in an emergency or leave them to their heirs. The lender, in turn, is protected against default risk, which is always possible due to the unpredictability of such events.

Management and refinancing of private debts

With a minimum of management and financial strategy, private debts remain an unobtrusive part of budget planning. This includes that the borrower always gets an overview of up to what amount they can take on private debts.

It is also sensible to regularly review the costs of a loan and to avoid having too many different lenders. There are many loan offers and consumer loans are often arranged with a low installment that initially hardly stands out.

When several of these installments come together, it is worth checking whether consolidating ongoing loans through refinancing brings advantages.

Interest on private debts

Another aspect of economically managing private debts is reviewing the agreed interest payments. Market interest rates change. A loan with a high interest burden can lead to an unnecessarily high monthly rate during a low-interest phase.

If it is clear that refinancing with lower interest reduces the monthly installments, refinancing is the best strategy to repay private debts more cheaply than before. Modern borrowers increasingly exploit these options for private debts more often than in the past.

Sticking to an old loan agreement with no longer market-appropriate interest is hardly justifiable economically and is also unnecessary. Many lenders now present their offers quickly and clearly online. The borrower can compare and often find out the result of a refinancing immediately using free loan calculators /.

Options for settling private debts

Before addressing the settlement of private debts, one should first obtain an overview of the exact debt situation. It is very helpful to file the relevant documents in a dedicated folder so that nothing gets lost. Additionally, one should make a list of how large the individual private debts are, what interest they carry, and what monthly repayments are being made.

At the same time, one should get a clear picture of one's income situation and determine which monthly amount is available for debt repayment.

When reviewing the interest rates of individual private debts, one usually finds that they vary significantly and can be disproportionately high depending on the creditor. For several years now, the legislature has also allowed the possibility of personal insolvency for private debts.

At first glance this may sound attractive to many: all private debts are discharged after meeting various conditions. However, this route should only be chosen as a last resort, as it takes several years and typically costs one creditworthiness for about nine years. In addition, the conditions during personal insolvency are not easy to meet and require precise disclosure of income for the period.

Refinancing

A far more pleasant method for settling private debts is refinancing, in which a new debt is taken on to settle the old private debts. This is particularly advisable when private debts exist with various creditors and one can thereby obtain a single repayment arrangement. You no longer make payments to multiple parties, but only to one, which gives a clear overview of your debt situation.

At the same time, you avoid becoming completely credit-impaired — with regular repayment of installments this will be reported as a positive entry to the Schufa. Refinancing private debts is therefore in most cases an optimal solution for settling liabilities.