Just under 23 million loan inquiries and an increase of more than 17 percent in just under eight million new installment loans: The figures of credit bureau from their credit compass 2017 impressively prove that consumers are very familiar with the topic of “borrowing”.
It is pleasing that nearly 98 percent of the consumer loans raised are repaid to the bank in accordance with the contract. At the same time, more than two million households were over-indebted in 2016, and this figure has also skyrocketed.
So, while many consumers are responsible for taking credit and banks support that sense of responsibility with solid lending, there is an increasing number of consumers whose assets exceed their debt. So what do you need to know before you take out a loan so you do not get into over-indebtedness? This guide shows what matters in practice.
When is a payday loan worthwhile and when?
Behind every financing is a repayment obligation. Regardless of whether you are making a long-term home purchase loan or deciding on a consumer loan for a short-term household budget, you must repay the loan at the agreed time. As a rule, repayment is agreed over a longer period of time.
Your payment obligation accompanies you over several years. For this reason, borrowing is only responsible if your financial situation is stable. That means you should not be over-indebted. You should also have a regular income. This is to ensure the repayment.
The loan installment should only account for ten to fifteen percent of your total monthly income. However, this only applies if you do not hold any other credit obligations. Before you take out a loan, you should also think about the nature of the purchase. Not every purchase makes sense to finance it with a loan.
For example, borrowing money is worthwhile if you want to buy a car or a washing machine. Also for the purchase of a home furnishings or a television, it can be useful. As a rule of thumb, it is a commodity that can be used in the medium to long term.
You should use it at least until the loan is fully repaid. Otherwise there is a risk that your credit obligations will pile up, even though the purchased item will no longer bring you added value for a long time.
You should therefore only finance a purchase if you receive a material good that can be used in the medium term as a countervalue. For this reason, consumer advocates usually advise against financing a vacation trip with a loan. Here, you usually pay off the credit much longer than you benefit from the trip. Therefore, consider very carefully whether it is worth taking a loan for your purchase.
Which loan should I choose?
In essence, you have three options for taking out loans: the classic installment loan, the repayment credit, and a credit card loan. All three variants have advantages and disadvantages that you should know before deciding on the appropriate financing.
The installment loan – also referred to as consumer or consumer credit – is a very common form of credit if you want to finance a larger purchase or if you want to balance a covered account. With a installment loan, the bank pays the desired amount to you.
The repayment is made in equal monthly installments, the term of the loan is fixed. As an indication, low credit lines lead to a long term. So, if you want to be debt free soon, your monthly loan installment should be as high as possible. For most consumer loans, you can make free special redemptions. An immediate complete return is often possible.
Before you take out a consumer loan, it is important to compare the interest rates and the terms of the banks. These are very different, so it’s worth taking a closer look. Above all, the interest rates are important in the credit comparison, because they represent the cost of your financing. The fastest way to run an interest rate comparison on the Internet with the help of an online calculator. From the online calculator, the loan can then usually be applied for the same.
An overdraft loan – referred to as a credit line for short – is a credit line that your bank gives to your checking account. You can therefore overdraw your account by the agreed amount. With a given credit rating, a framework of two to three monthly incomes is released. The disposition credit is set up once when you open the current account or even afterwards.
You can then exhaust the credit line again and again without having to apply for it again. Compared to the installment loan, the credit line is very expensive. Interest rates are in the low double digits of many banks. Therefore, credit experts recommend that the credit line be repaid by a cheaper installment loan, if the credit line is fully utilized in the long term.
The third variant of financing is the credit on a credit card. Here usually a framework of around 2,000 euros or more is put. The credit line granted depends, among other things, on the amount of regular income. Like the credit line, the credit card loan is quite expensive financing. Again, it can be used at any time and does not have to be requested again each time.
Which credit is recommended for your purchase depends on the individual circumstances. Before you decide on a variant, you should check the credit conditions carefully. Above all, compare the amount of interest and the possibilities to repay the borrowed money quickly and flexibly. With a larger amount of funding, you also check the collateral that the lender demands from you. As a guide to your decision, the loan that best suits you brings you maximum flexibility at reasonable interest rates.
Which requirements do you have to fulfill?
To successfully apply for a loan, you must meet certain requirements. On the one hand, this includes legal prerequisites in order to be allowed to borrow money in Germany at all. On the other hand, the conditions that your lender places on your credit rating are also covered.
Before the lender approves your loan, he checks whether you meet all legal requirements. To do this, you must be of age and have a permanent residence in Germany. You must have a checking account with a bank based in Germany. This account is used to collect the loan installments. You also need to complete the financing in your own name and for yourself.
Your employment should be indefinite, it must not be terminated. If you only have a fixed-term employment contract, this should at least cover the term of your loan. It should also be noted that the financing bank can demand collateral from you. Especially with a high volume of credit or a long term, the lender wants to make sure that you can pay your debts.
Such collateral may, for example, be in the form of a collateral assignment to a vehicle. You use your car, but transfer ownership of it to the bank by handing it the vehicle registration document. For a house financing loan, it is common practice to enter a land charge in the land register.
If these conditions are met, the financing bank wants to have an indication of your credit rating. The credit rating is your credit rating. The lender wants to be sure that you can repay the borrowed money safely over a longer period of time. For this purpose, the bank conducts a credit check. In order for your credit rating to be assessed positively, a regular income is required.
The best chances for a high credit rating you have as an employee or as a civil servant with a high income. Of course, self-employed people often also receive quite regular income. Nevertheless, the creditworthiness of this clientele is examined even more closely. In addition, the bank requires an extract from the credit bureau from you as part of the credit check. In the credit bureau all business transactions are registered, which give evidence of your creditworthiness in any way.
This is why, for example, borrowed or repaid loans or loans are repaid in credit bureau, including bank account details, credit cards and mobile phone contracts. Based on this data, the bank checks whether you have met all payment obligations in the past in accordance with the contract.
In addition, your credit bureauscore plays a role. This is a statistically calculated ratio for your creditworthiness. The score can be a maximum of 100 percent. If your score is between 95 and 100 percent, your credit rating is so solid that a loan application should be approved. You will get your score from your credit bureau entries. If the bank attests to a high credit rating, you will benefit from attractive interest rates with many lenders.
If the bank sets interest rates taking into account your creditworthiness, borrowers with a high credit rating will tend to receive a lower interest rate. If your credit rating is less pronounced, it is more appropriate to choose a lender who will set the cost of your financing regardless of your credit worthiness.
So there are quite a few criteria to consider when you want to take out a loan. Above all, the strict examination serves your safety. Responsible lending by a bank also includes careful consideration of whether the borrower is financially able to meet his obligations or whether he is on the way to over-indebtedness in the short to medium term. An over-indebtedness is neither in the interests of the bank nor in your interest and should therefore be avoided by all contracting parties. This succeeds with a careful examination of the creditworthiness within the framework of a responsible lending.