Purpose binding

\

Purpose binding is primarily known in connection with and in the context of loans. For a long time it allowed more favorable conditions for financing when a specific intended use was defined. Nowadays it no longer directly affects the terms of a loan.

The term is not used today only in connection with loans. It also appears in public budgeting. In the context of public budgets, purpose binding is always treated as an exception to the principle of overall coverage, which generally applies.

Principle of overall coverage

Fundamentally, public budgets may deviate from the principle of overall coverage. In such cases, a so-called purpose-binding annotation must be used to establish the mutual applicability or non-applicability of funds. In public budgets, bindings to a purpose or intended use are only permissible if they are either prescribed by the relevant law or arise in conjunction with a specific revenue.

All revenues tied to a purpose are removed from general coverage. As a result, they cannot be used to finance all expenditures but are available only for certain liabilities. This option can generally be used only exceptionally at the municipal level. Fee budgets (Gebührenhaushalte) are excluded from the applicable principle of overall coverage. For all fees, a cost-covering calculation is primarily sought. Such a calculation can only be carried out if no other revenues are available for the respective financing. The calculation of fee revenue must therefore be applied to the tasks for which it is intended.

Municipal authorities

This is particularly evident with municipal authorities; classic examples are municipal waste disposal and water management. All waste fees paid to municipalities may therefore be used exclusively for the purpose of waste disposal. Any surpluses in this area are also purpose-bound and may not be used elsewhere. According to applicable laws, corresponding reserves must be established from them.

In public budgets, purpose binding is intended to provide greater transparency for citizens. This transparency cannot be found in the principle of overall coverage. Although citizens can still trace individual expenditures in the valid budget plan, they cannot identify the corresponding revenue sources.

Purpose binding for a loan

Purpose binding is still not uncommon for loans and is used particularly in connection with certain types of loans. One of the best-known purpose-bound loans is the home savings loan (Bauspardarlehen). It may be used only for renovations, refurbishments, home purchase, and house construction. The home savings loan is therefore tied to use in connection with real estate. Because of this purpose binding, lenders often offer more attractive terms for home savings loans than for other types of financing. Lenders frequently grant not only attractive interest rates but also higher loan amounts and more favorable repayment terms, making the monthly burden easier for the borrower to manage. For the home savings loan, the purpose binding is anchored in the Bausparkassengesetz and is specified as having residential purposes.

Some lenders require proof from a certain loan amount that the required purpose binding has actually been observed. This can, for example, be demonstrated by presenting purchase receipts and invoices. To make the purpose binding clear, lenders use specific loan designations. In addition to the mortgage loan (Grundschulddarlehen) and the home savings loan, the car loan (Kfz-Kredit) is also known as a purpose-bound financing option. It can be used when purchasing vehicles. It is suitable for both used and new cars.

Purpose binding usually increases security for lenders on loans. In return, borrowers obtain more attractive interest rates. With purpose-bound loans, lenders have greater security, for example through the vehicle or the property, and can rely on a form of collateral.

Possible loans tied to a purpose

A well-known loan that has a purpose binding is the mortgage loan (Grundschulddarlehen). Loans of this type are secured for the lender by an entry in the land register. The high level of security minimizes the lender's risk. With the mortgage, lenders have access to the respective property if borrowers can no longer pay the loan installments. The property can then, for example, be offered for sale or auctioned by the bank.

The forced auction is intended to ensure repayment of the loan amount to the lender. When the mortgage is entered in the land register for a purpose-bound loan, the lender's claims are always independent of claims from other creditors. However, only the lender who is entered in the land register can enforce a property in case of payment arrears. Mortgage loans are usually equipped with a purpose binding and can therefore be used exclusively for real estate financing or for carrying out renovation and modernization measures.

If a property is unencumbered, it can, however, be used as collateral for a loan that does not have a purpose binding. This can improve the borrower's creditworthiness and increase the chance that the bank will grant the loan. The mortgage loan without purpose binding has been able to establish itself in the financial market in recent years.

A home loan that is primarily used for renovations and refurbishments of a property is usually offered with a purpose binding. Compared to a classic installment loan, a purpose-bound loan is often cheaper. In its structure, the home loan is very similar to an installment loan. However, the loan amount may only be used for repairs, improvements, or renovations of the owner-occupied home.

The car loan

A car loan can also, as mentioned, be tied to a specific purpose. Accordingly, the loan amount of this credit may be used exclusively in the vehicle sector. A car loan does not always have to be used to purchase a new vehicle; it can also be used for major repairs. Auto financing is generally one of the cheapest and most attractive models when it comes to a purpose-bound car loan.

The collateral is usually provided by the vehicle registration document (Fahrzeugbrief), which is deposited with the lender. It is returned to the borrower only when the loan amount has been fully repaid. Borrowers must generally prove how they used the loan amount for a purpose-bound car loan. This can be done in various ways, for example by providing the purchase receipt, the purchase contract, or the vehicle registration document.

Further information on purpose binding

Data protection & data protection law & BDSG

(Federal Data Protection Act) The term purpose binding — i.e., the restriction to a specific intended use — also appears frequently in the context of data protection (under the BDSG). The census ruling of the Federal Constitutional Court (Volkszählungsurteil) is often cited here; in its decision in 1993 it established that data may only be stored on a precautionary basis for specific purposes. According to §31 of the Bundesdatenschutzgesetz (BDSG), personal data that are stored exclusively for the purposes of data protection control, data backup, or ensuring the proper operation of a data processing system are subject to a "special purpose binding" and may be used only for these purposes.

Under public data protection law, public authorities may generally collect personal data only for a defined purpose. The principle of data minimization applies in the Bundesdatenschutzgesetz (BDSG).