Whether it’s a car, home-building, home furnishing or other major purchases – these are classic situations where consumers usually apply for an online loan. Those interested in obtaining a loan must meet a whole range of requirements in order to maintain their creditworthiness.
- What requirements must be met in order to take out a loan?
- Which criteria do banks use to grant credit?
Importance of creditworthiness
What is meant by creditworthiness?
If you want to apply for a loan, you have to prove your creditworthiness. This term is replaced today by the term credit rating. In short, creditworthiness means that a bank trusts the claimant to pay back the installments in duly completed installments . The parameters that decide on the creditworthiness of a client are a positive information of the Bank and a fixed income that is appropriate to the loan amount. By providing guarantors or property as collateral , applicants have the opportunity to increase their creditworthiness . A debt service is defined as any encumbrance associated with taking out a loan. On the basis of all income, expenses and other financial expenses, the bank can see whether the applicant can provide this additional capital service due to the credit. If the decision is positive, the creditworthiness is proven.
Those interested in obtaining a loan must meet a number of requirements in order to obtain credit from the principal bank or another bank.
Checklist: 7 criteria for a loan
1. The age of the borrower
The credit rating is a matter of age. For both a regular installment loan and a credit line, the applicant must be of legal age. Only at the age of 18 are young people considered fully capable of business. If you want to apply for a loan before, you need the signature of your legal guardian.
Age also plays an important role in lending in another way. Often the banks at the age of 65 draw the line. The background is that the residual debt insurance ends at this age. Seniors would either have to teach a guarantor or have collateral to obtain a loan. Overall, the group of pensioners is underrepresented in terms of loan requests. So far, this age group has increased savings.
2. The residence of the applicant
It persists stubbornly the thesis that in the east of Germany it was worse for the creditworthiness
ordered as in the west. The fact is: wages in the new federal states are about 30 percent lower than those in the rest of the republic, unemployment is higher. That says nothing about how it is ordered to the payment moral. Because a countercheck at the Bank shows that the negative entries spread evenly across all federal states. In the top 10 cities with the worst payment behavior, Schwerin is the first East German city in 10th place. Leader is the small town of Pirmasens in the Palatinate. The data analysis shows that there is a gap between north and south . In conurbations such as the Ruhr area, the debt is greater than in rural Bavaria.
3. The income
The necessary income, which banks determine as the basis for the creditworthiness, is a question of the desired loan amount. But with the income alone, it is not enough, because monthly fixed costs go down as well
- Rent and ancillary costs
- Cost of living
- Possible maintenance obligations towards children
- Current loans and installment payments
- Existing real estate or construction financing
More transparency would come about when banks each define income limits for certain loan amounts. The requirements vary from bank to bank. Also for the monthly expenditure various calculation models are used. Some calculate the cost per person with 600 euros, others with 800 euros. Of this, the rent is deducted. For small loans , the formula can be used to calculate the monthly net income X 3 = maximum possible loan amount.
4. The income of self-employed
For self-employed, income must match the desired amount of credit and the monthly installment. Banks demand the lending of recent months in the lending. Anyone who has been self-employed for some time, has it easier than someone who has been running his own business for a short time. Also, forecasts from experts or expert opinions form a guide for the banks. Tax returns and annual accounts are always required. Sometimes banks want to have insight into order books. There is no general procedure, it applies the individual case. The procurement modalities also depend on the type of credit.
Business loan or credit for entrepreneurs:
In order for a start-up loan to be granted, the bank depends on the usual collateral. In addition, many things stand and fall with the business idea and the business plan. If the clerk sees profits for the foreseeable future, credit is usually granted.
The KAC lends money to start-ups at favorable conditions, which do not have to be repaid immediately. Here a conclusive business plan decides on the creditworthiness.
Real estate loans:
In contrast to other loans, the bank has a mortgage registered in the land register, so that the property in case of doubt as collateral. Like everyone else, self-employed people must have equity in the purchase of property in order to be creditworthy. Financial experts advise to 25-30 percent of the purchase price.
5. Credit rating and Bank
If you want to compare the conditions of the individual banks, you must pay attention to an important detail. If a loan request is made to several institutions and passed on to the Bank, the customer is suspected of wanting to apply for several loans. The Bank thus concludes on a bad creditworthiness and poor economic conditions. Thus, the simple wish for a bid comparison can lead to bad creditworthiness. Customers should be careful to ask for a credit term request . If this request is sent to Bank, it will have no impact on the scores and it will be safe to procure all necessary credit information.
6. The amount of credit installments
If income and desired loan amount match, the bank will create a budget to set the monthly installment and thus the term . Borrowers are often insecure: Should they choose small installments because of low interest rates or put the money saved into higher eradication? In addition, not all rate options are possible. Most banks start at a term of up to eight years , excluding real estate loans. Basically, if you pay faster, you save . The higher monthly installment reduces the residual debt, which ensures less interest. This has the pleasant effect that at the same rate the eradication increases and the residual debt thus shrinks . In principle, therefore, a compound interest effect in the opposite direction.
7. The employment contract: What conditions apply to the employment contract?
Even with good earnings, lending fails because an employee is still in probation. The bank fears that the applicant will fail the probationary period and thus can not meet its payment obligations. For these reasons, lending to people in the probationary period is complex. The situation is somewhat different for a fixed-term employment contract. Banks have now reacted to the reality that more and more people only have the option of a fixed-term employment contract. If the loan repayment term, desired loan amount and remaining period of employment coincide, the banks generally give the green light to persons with fixed-term employment contracts. Otherwise, probationary and fixed-term workers have the option of providing collateral or providing a guarantee.
The collateral in the lending
What collateral helps with lending?
The amount of collateral is equal to the volume of credit. If collateral collapses during the life of the loan or the loan is increased, the bank can claim additional collateral for creditworthiness. Collateral is divided into two categories.
Private guarantee: A third person is liable for the private loan guarantee of the borrower. If the form of the enforceable guarantee is chosen, the bank can immediately resort to the assets of the guarantor. More frequent, however, is the deficiency guarantee . The guarantor will only be held liable after the process against the debtor has ended without success. Guarantors are liable like the borrower. As a rule, relatives guarantee, besides friends and business partners come into question. Spouses are less welcome as guarantors because of their emotional attachment, sometimes problems arise in court. A bank does not have to accept the respective guarantor. Private guaranties not only present the guarantor with the risk of having to pay for the debt in the end. This can have a negative effect on the interpersonal relationship.
Bank guarantee: In the case of a bank guarantee, the bank acts as guarantor , the debtor pays an annual fee for this. Thus, the debtor is able to prove to third parties that he is able to meet his financial obligations. For private individuals, the bank guarantee is often used for rent deposits. The advantage of a bank guarantee is that the liquidity of the debtor is spared.
Mortgage or mortgage: Mortgages and mortgages usually refer to real estate or land. The valuation is simple: If the debtor does not fulfill his obligations, the bank can foreclose the property. A mortgage is repaid after repayment from the land register. The mortgage remains even after the eradication in the land register.
Assigned by security: Assigned by security means that the borrower hands over a movable property to the bank in trust, but uses it on a continuous basis. This principle comes into play when buying a car.
Assignment of claims: A borrower has the option of assigning the monthly salary claim to the bank as collateral. In case of default, the bank can contact the employer directly. Real estate is often financed in this way.
Required documents for the loan application
Which documents are usually required for the loan application?
The documents required for a loan application depend on the professional profile, but also on the type and duration of the loan.
Employees usually need:
- Payroll from last year
- Proof of an existing employment relationship
- Tax return or income tax assessment
- Proof of regular payments such as rent, maintenance, other loans, insurance, private pension
- additional income
- Information about savings accounts, stocks and other investments
- Proof of real estate
The self-employed additionally require:
- Profit and loss account
- Economic evaluation
- tax certificates
- Business plan for start-ups
Different conditions and special features
What are the differences in terms of credit requirements?
Banks are bound by very rigid framework conditions when it comes to lending. Whoever fulfills all conditions and financially wants to have everything under one roof, is certainly well served by the house bank. However, flexibility is particularly important in today’s installment payments, as many consumers only want to bridge a financial shortage in the short term and need amounts between 100 and 3000 euros. This sum is unattractive for many conventional banks. Exactly this gap closes the Small Lender small loan. The term lasts a maximum of six months, so that no one has to tie up long. Transparency is the top priority, there are no hidden costs.
What changed credit conditions for students, pensioners, civil servants, self-employed, apprentices and the unemployed?
While civil servants and permanent employees are almost always on the safe side with basic credit ratings, students, the self-employed, pensioners and the unemployed have big problems getting a loan . Small loans and express loans have the great advantage not to exclude this group of people. For Small Lender, the condition for lending is that a monthly income of 500 euros and corresponding creditworthiness must be guaranteed. These are points that both students and recipients of Unemployment II and pensioners can meet.
Notice periods and right of withdrawal
Can a loan be terminated early?
If the financial situation changes for the better, many consumers would like to repay their loan prematurely. If the loan is terminated, the banks are entitled to a so-called prepayment penalty . This may amount to a maximum of one percent of the remaining debt. For example, if you have to repay 3000 euros of debt, you have to pay 30 euros. The situation is different with mortgage lending . Anyone who quits here before the expiry of a ten-year period often has to pay thousands of euros as compensation. In the event of a faulty cancellation policy or a loan with variable interest, the prepayment penalty no longer applies.
Is there a right of withdrawal?
Up to 14 days after the conclusion of a contract, it is possible to cancel a loan. This includes all types of loans from auto finance to home loan. Excluded from this right of revocation are small loans and so-called short-term contracts. The borrower must declare his withdrawal in writing , preferably by registered letter. A justification is not necessary. Banks must inform their customers of this cancellation option. A faulty cancellation policy makes it possible to withdraw from the loan for many years after conclusion of the contract. Mortgage lending can often save thousands of dollars.