Repayment

Repayment means the settlement of debts. This can take place either according to plan or outside the agreed schedule. Repayment is not only used for loans, credits or bonds, but for any kind of monetary claim.
Repayments increase liquidity for the creditor while reducing it for the debtor. Therefore, it is sensible to set repayment installments according to the debtor’s current and future income. 

What is meant by repayment?

The term repayment comes from finance and denotes the settlement of debts or, in other words, the removal of liabilities. This can be carried out either as planned or unexpectedly. Repayment is an important element in all forms of monetary claims, especially loans, credits or bonds. Repayment is an essential condition in these cases.
It is recorded in a contract between two parties, the creditor (= lender) and the debtor (= borrower), with their corresponding declarations of intent. As creditor you provide financial means which the debtor repays via the agreed repayments. An extraordinary repayment is possible by arrangement.
The repayment rate defines the share of the monthly instalment that serves to reduce the loan principal, but it does not include the interest portion. The monthly instalment consists proportionally of a part that is used to repay the loan principal (repayment rate) and another part that serves to pay interest. Two things are crucial for successful settlement of the debt:

1. The debtor commits to the full repayment — in short, the repayment — of the borrowed amount. In addition, interest agreed in the contract is charged. A debt is considered repaid only after the entire amount has been settled.
2. Interest is calculated on the principal amount. This is done as a percentage. The total debt results from the actual amount and the interest.

What is the difference between repayment and instalment?

An instalment is the actual monthly amount due for repaying the loan. The instalment usually consists of the repayment portion (repayment rate) and the interest. However, the monthly instalment may, especially at the beginning of the loan term, contain no repayment at all. In this case, the instalment initially only covers the interest and the loan principal is not yet reduced.
Repayment refers solely to the actual repayment of the loan principal. Whether the monthly instalments already include a repayment rate or consist only of interest depends on the chosen repayment variant. When the loan contract is concluded, the amount of the monthly instalments is calculated and fixed according to the agreed conditions.
When speaking of repayment, it means the reimbursement of the actual loan amount without interest. This reimbursement to the creditor can be made in fixed monthly partial payments or as a single amount at the end of the loan term. An example of this is the variant of the bullet loan.

Are there loans without repayment?

Yes, these are called repayment-free loans. However, this term is somewhat misleading because monthly costs still occur. Unlike the classic variant, interest is paid in monthly instalments in this case. The remaining loan principal is due as a lump sum at the end of the term. For this reason, this special form is also referred to as a bullet loan. It is used, for example, in real estate financing and construction financing.

A loan without a repayment schedule offers the advantage of low financial burden during the loan term. However, one should be able to pay the entire repayment sum at the end. There is the option to refinance the repayment via a building savings contract or a life insurance policy. Increasingly, this helps to make the dream of home ownership more attainable. Put bluntly, you save for your house while already living in it. However, it should be noted that the expected payout amount should be higher than the loan. This can guard against possible inflation over the credit period.

How does repayment work?

What are the requirements for repayment?

• Age: When granting loans, lenders pay particular attention to whether the borrower has reached the age of majority (18 years). Only then is a person fully legally capable in Germany. Lenders usually set upper age limits around retirement age. Few credit institutions specialize in lending to older people or pensioners due to the increased risk of death during the loan term.
• Residence: A permanent residence in the Federal Republic of Germany is indispensable to obtain a loan in Germany.
• Income: A regular income is decisive for a loan. For employees in permanent positions, the last three payslips are typically requested as a reference. Banks want certainty about whether income will change or remain stable in the near future. If there are strong fluctuations, it is significantly more difficult to obtain the desired loan. The same applies to fixed-term employment contracts or loan applications during a probationary period. Lenders generally assess their risk in advance. Therefore, it is often harder for self-employed people to get a loan. Even with positive business evaluations (BWA) and meaningful tax returns, banks often see longer-term issues. Past income is not necessarily a guarantee for future income.
• Loan collateral: These are essentially required as collateral so that the creditor gains more trust and more security when issuing larger repayment loans. Especially in real estate loans, construction financing or, for example, the purchase of a new car, debtors commit to monthly payments for a long period.
• Creditworthiness: Creditworthiness refers to the applicant’s ability to repay. It is determined by Schufa or other scoring agencies. These credit bureaus collect data about existing loans, mobile phone contracts and — put simply — the consumer’s payment behaviour. Very good creditworthiness positively affects the interest rate. Negative Schufa entries usually have a negative effect on loan approval.
• Guarantee: In rare cases, the borrower’s own collateral is not sufficient. To avoid rejection, a guarantor may be required for the loan contract. If the borrower can no longer pay the monthly instalments, the guarantor must step in. They take the debtor’s place and are obliged to assume the repayment of the loan on their behalf. Depending on the contract, this can apply already on the first missed payment.
• Additional insurances: Through optional insurances, such as the residual debt insurance, the lending bank secures an additional means of protection. These are well-established tools for lenders, whether as an additional business or for their own protection. Requiring the conclusion of an additional residual debt insurance, for example, covers potential risks of the debtor.

  

What different types of repayment are there?

Generally, a distinction is made between scheduled and unscheduled repayment, as well as between instalment repayment and single repayment.
Scheduled repayments: These repayments are made based on a repayment agreement in the loan contract. They usually occur at certain intervals and in a certain amount.

• Unscheduled repayments: These repayments are not separately agreed but occur without a fixed plan. Debtors are not obliged to make unscheduled repayments; they can simply adhere to the loan contract. However, unscheduled repayments shorten the loan term and thus reduce costs.
• Instalment repayment: Instalment repayment means that repayments are spread proportionally over the entire loan term. These occur at fixed times. Single repayment: A single repayment means the full loan amount is repaid in a single payment at the end of the term. This means the debtor’s liquidity is not affected during the loan term. However, the debtor must settle the entire loan amount plus interest and costs at the repayment date.
• Annuity repayment: Annuity repayment is a regular repayment where the annuity amount consists of the repayment and interest portions. The total amount remains the same. If the repayment rate is increased, the interest portion decreases accordingly and vice versa. Unlike annuity repayment, the additional interest burdens are not taken into account in other repayment types. For long-term loans such as real estate financing, repayment is also referred to as amortisation.

  

The repayment schedule

What should you generally consider when repaying a loan?

Ideally, a loan should add value to your life, whether through its product-related use or to provide financial relief. To keep an overview, it is worth considering a few points when choosing a loan.

• The loan term: This aspect should not be underestimated. The chosen loan and its repayment will accompany the borrower for a long time. To find the right term, some eventualities should always be clarified. For example, consider:
  • How secure is the job?
  • Will there be enough money left during the repayment period for unplanned special expenses or to build a reserve?
  • How long is the expected lifespan of the product to be financed?
• The annual interest rate p. a.: is an extremely important figure when deciding on a repayment loan. The abbreviation “p. a.” comes from Latin (per annum) and means “per year”. This term is omnipresent in repayment offers of any kind. The indicated percentage shows how much interest will be added to the loan amount each year. As the financed amount ideally decreases with each monthly instalment, the interest portion to be paid also changes over the years. Banks therefore already calculate the annual interest rate (p. a.) over the entire loan term when the loan is concluded. At the beginning of the term, mainly the interest is paid to the bank. Only afterwards does the actual repayment of the loan begin.
• The amount of the monthly repayment instalment: The repayment amount and therefore the monthly burden should be well considered. To repay a loan faster, a higher instalment is sensible. With each payment, the repayment portion is reduced. Conversely, a longer term allows for a lower repayment instalment to be calculated. To avoid mainly paying the bank’s interest portion, the repayment rate should not be set too low. Always be sure not to overextend your expenses for the duration of the loan term.
• The repayment date: This is a small but very important detail. Usually you can choose between a scheduled debit on the first of each month or mid-month. The date can typically be adjusted individually. There should be enough money in the specified account on the chosen date. A reversal of the direct debit always incurs unnecessary additional costs that should be avoided.

What is a repayment extension (Tilgungsstreckung)?

This special instrument in banking allows borrowers to obtain a second loan. Repayment extension is usually applied in loan contracts when a so-called discount (Disagio, also called Abgeld) has been retained. This is a deduction paid at the time of loan approval. The amount is subtracted from the loan sum in advance and therefore not paid out. In repayment extension, there is the possibility of being granted a second loan. This extension loan is paid out in the amount of the Disagio. Repayment instalments are applied to the extension loan first. Only afterwards does repayment of the main loan begin. Therefore, the overall repayment is stretched — i.e. extended.

Repayment disruptions - definition, prevention and remedies

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What is meant by repayment disruptions?

Repayment disruptions occur when agreed repayments are partially or completely missed. In this case there is a debtor’s default or a performance failure. Lenders usually protect themselves in contracts with a termination clause that allows creditors to demand the full outstanding loan amount immediately as soon as a repayment disruption occurs. As a gesture of goodwill this is often not enforced immediately.
The so-called cross-default clause in loan agreements is intended to prevent changes in the repayment agreement and repayment priority by the debtor. The repayment priority comes into effect when the debtor has debts with multiple creditors and cannot make all repayments. There are ways to counteract a repayment disruption.

Repayment deferral - suspension of repayment payments

Is it possible to suspend repayment during the loan term?

It is possible to arrange a deferral or to negotiate a new repayment agreement. A deferral is an agreement between debtor and creditor to postpone a claim beyond the due date and settle it at a later time. Both options to lift a repayment disruption — deferral and a new repayment agreement — lead to an extension of the repayment period. Interest charges also increase. At the same time, repayment instalments can be reduced. This procedure sometimes becomes necessary when the personal and financial circumstances of the debtor have changed. These possible changes to the repayment plan can prevent over-indebtedness of the debtor.

Repayment - Frequently Asked Questions

Do you have to pay the full interest in case of early repayment?

No, however early repayment of the loan is associated with additional costs. Early repayment causes a financial loss to the bank. This may seem odd at first, but it is justified. The lender suffers a loss of the interest for the remaining term. A so-called prepayment compensation is often required. This is calculated as a percentage of the outstanding debt at the time of repayment. For instalment loans it amounts to a maximum of one percent. For this reason, you should carefully calculate or even consider refinancing before an early repayment to see whether such a special repayment is really worthwhile. Even one percent can be a considerable sum. Whether a special repayment is possible for the chosen loan type and under what conditions is always recorded as a separate clause in the loan contract. If you want to keep the option of a special repayment open for the future, you should therefore pay close attention to the conditions already when signing the contract. Analyse the amount of the prepayment compensation — it is usually one percent of the outstanding debt — if it is higher than one percent of the outstanding debt, the costs of early repayment may be too high.

How flexible is repayment of a building society loan (Bauspardarlehen)?

In principle, every building society contract contains fixed repayment rates that are not negotiable. This primarily concerns the prescribed minimum repayment rate. It may not be undercut. However, repayment rates can vary. This depends on the valuation number or other criteria such as elective or multiple allocations.
It is possible to make special repayments in any amount. The monthly repayment instalment can be increased at any time if needed. The minimum repayment rate must not be undercut — you are flexible when increasing it.

Does the creditor have to repay the repayment?

According to §§ 362 ff. BGB, repayment constitutes performance. Therefore, the conditions set out in §§ 362 ff. BGB apply. Paragraph 1 also states that the obligation is extinguished with the complete provision of the owed performance. The repayment does not necessarily have to be made by the debtor personally, so in theory relatives, friends, etc. can also assume it.
According to the law, the creditor is basically not concerned with where or from whom the repayments are made.

What happens if a debtor has multiple obligations with the same creditor?

If a debtor has several obligations with the same creditor, a repayment designation must be made pursuant to § 366 (2) BGB. This includes, in addition to the actual repayment, also additional costs and interest. These must, as set out in § 367 (1) BGB, be applied first to costs, then to interest and finally to the debt.

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What legal conditions apply to payment receipt?

Repayments are to be made at the place of performance, which is usually the creditor’s place of residence or business. According to § 368 BGB, the debtor can demand a written receipt from the creditor for the repayments made. When making repayments there is no duty to bring the payment, even if the place of performance is the creditor’s business or residence. Here § 270 BGB applies and therefore it is a qualified dispatch debt. This means that the debtor bears the full risk until the repayment has demonstrably reached the creditor. It is irrelevant whether a mistake by the debtor or a bank error occurs, etc.
If the repayment amount does not reach the creditor at all or is late, the borrower is obliged to make the payment again. A late receipt by the creditor is disregarded if the debtor has carried out all necessary steps in time to make the payment punctually. The debtor is only relieved of the risk once the amount has been received by the creditor. Thereafter the creditor bears full responsibility for the received repayment.

Can the repayment rate be claimed for tax purposes?

In the tax return, only the interest on a loan can be claimed, but not the repayment (repayment rate) itself.

Legal situation regarding repayment

According to §§ 362 ff. BGB, repayment constitutes performance. Therefore, the conditions set out in §§ 362 ff. BGB apply. Paragraph 1 also states that the obligation is extinguished with the complete provision of the owed performance. The repayment does not necessarily have to be made by the debtor personally, so in theory relatives, friends, etc. can also assume it.

According to the law, the creditor is basically not concerned with where or from whom the repayments are made. If a debtor has several obligations with the same creditor, a repayment designation must be made pursuant to § 366 (2) BGB. This includes, in addition to the actual repayment, also additional costs and interest. These must, as set out in § 367 (1) BGB, be applied first to costs, then to interest and finally to the debt.

Repayments are to be made at the place of performance, which is usually the creditor’s place of residence or business. According to § 368 BGB, the debtor can demand a written receipt from the creditor for the repayments made. When making repayments there is no duty to bring the payment, even if the place of performance is the creditor’s business or residence. Here § 270 BGB applies and therefore it is a qualified dispatch debt. This means that the debtor bears the full risk until the repayment has demonstrably reached the creditor. It is irrelevant whether a mistake by the debtor or a bank error occurs, etc.

If the repayment amount does not reach the creditor at all or is late, the borrower is obliged to make the payment again. A late receipt by the creditor is disregarded if the debtor has carried out all necessary steps in time to make the payment punctually. The debtor is only relieved of the risk once the amount has been received by the creditor. Thereafter the creditor bears full responsibility for the received repayment.