The credit business in Germany
In 2014, just over 7.4 million installment loans were taken out in Germany. In the same year, the volume of loans issued to private individuals totaled an unimaginable number of over 1,000 billion USD. However, this did not take into account the type of loan. Of course, most consumers think of the term “credit” as installment loans, but a differentiation has to be made here. Household loans are divided into
- installment loans
- Disposable loans
- credit Lines
- Construction Financing
- rental guarantees
- Securities lending
Although a rent guarantee for a bank is only a so-called contingent liability, guarantees are fully covered by the guidelines for lending.
Lending business in Germany is booming, even if it has recently declined somewhat, as the following graphic shows:
Image: Number of new installment loan agreements in Germany. Image source: own illustration
It is interesting to note that despite the low interest rates that followed the financial crisis, demand did not explode dramatically. The number of significant deviations from 2008 is limited to the years 2009, 2012 and 2013.
Loans with foreign donors, such as loans from Switzerland, are not listed in the table.
Loans – nothing would work without them
Even in the 1970s, it was almost an honor when a consumer needed an installment loan. The way to the bank was more like a Canossa walk. However, this has changed fundamentally, loans are now a commodity.
Consumers compare where this product is cheapest or offers the best conditions. Bank employees, also due to the enormous competitive pressure of direct providers, have become credit sellers who have to actively advertise their goods. The importance of credit for the economy is demonstrated by the fact that almost every retailer today offers installment payments. On the other hand, Mario Draghi’s efforts to bring cheap money to people is the need to keep the economy going. Without the option of consumer finance, our economic system as we know it today would no longer be sustainable.
The previous generations still saved on one goal in order to then fulfill this wish. Against the background of hardly any interest, this is difficult to do. In addition, consumer behavior has become more short-lived. Cheap furniture from Sweden in combination with low interest rates make it possible for your own four walls to be redesigned every now and then. A wall unit is no longer a purchase for the rest of life.
There has been a type of specialization in particular with installment loans. Auto loans are usually issued on more favorable terms than a loan for free use. The background is that the motor vehicle letter is ceded to the bank. If the borrower fails to meet his obligations, the bank can continue to use the vehicle and use the proceeds to repay part or all of the loan. This advantage leads to lower interest rates for the borrower.
The differences between the individual loan types
The loans listed above are known to most consumers, only the framework loan and the securities loan may be an unknown term for one or the other, so they should be briefly explained here.
A credit line combines the functionality of an installment loan with that of an overdraft facility. The borrower is granted a credit line in a sub-account. He only pays interest on the loan actually drawn. In contrast to a disposition, however, he pays a fixed rate every month. In addition, a credit line, in contrast to a credit line, must be backed by collateral. The interest rate is well below that of an overdraft, which is why banks are reluctant to offer it as an alternative.
Securities loans can be loans that are actually only issued for the purchase of securities, but also loans that are secured by securities. The problem with these loans is price fluctuations if stocks have been backed. If the market value of the securities falls below the credit line granted, the borrower must either provide additional securities as collateral in the shortest possible time, or repay the loan to such an extent that the collateral is sufficient again. Shares are also only recognized as collateral at 60 percent of their market value.
The lending process
The process for lending is almost identical except for the overdraft facility. First a credit bureau request is made, then the economic situation of the applicant is checked, and finally the security is checked. While the property to be financed serves as collateral in the case of construction finance, the assignment of salary is considered collateral for an installment loan.
The lending process for installment loans is also less individual than with mortgage lending, but is considered industrialized. This means that the creditworthiness check is carried out almost 100 percent on an IT basis. Each bank determines a so-called scoring for the respective customer. This scoring states whether the borrower receives a loan and, if so, how high the interest rate is. The weaker the scoring, the higher the interest rate, since this rates the credit risk. The scoring includes, among other things
with a. An official is almost irrevocable, a circumstance that leads to particularly favorable conditions. The situation is different with a bricklayer, since the construction industry is repeatedly aware of bankruptcies among employers and thus the loss of jobs for employees.
If the borrower is married and has children, this means discounts in the classification. A divorce with maintenance payments can never be ruled out, repayment of the loan could be at risk.
The bank uses the place of residence query to determine how many loans from this particular region have not been repaid. The evaluation of the socio-economic data is quite risky because it is unspecific in relation to the individual applicant.
Something else about loans from Switzerland
Swiss loans play a role in the German lending business. In the past, Swiss loans, including loans without credit bureau, always had the stable smell of the semi-silk. Loans without credit bureau were something for people who no longer had any credit rating. That’s not quite true. There are very good reasons to apply for a loan in Switzerland. In Germany, the self-employed often bite granite when applying for an installment loan because there is no salary assignment and the banks are too laborious to check the collateral. If you are planning larger financing, you may not want to worsen the conditions with a small loan. Swiss loans are also often used as a “loan on the side”. The requirements for a loan from Switzerland are almost identical to borrowing in Germany, the credit bureau request and the credit bureau application do not apply.