“What is a loan?” Stupid question, you think? Everybody knows… you borrow money and pay it back month after month with interest. Done! Right? Because it’s not quite that simple. For example, there doesn’t necessarily have to be money involved – although in most cases, of course, that’s what it’s all about. But in fact loans have been around longer than money. Sounds more exciting than I thought, doesn’t it? And what exactly is it about creditors, debtors, early repayment penalties and special repayments?
A question of faith – since pre-Christian times
By definition, a loan is the “temporary provision of money or property for use”. The recipient undertakes to return what has been given to him – and often in return for being allowed to use it. In the case of a bank loan, for example, the interest is this consideration.
This concept is by no means a modern invention. Quite the opposite: credit transactions existed as early as 3,000 BC – long before there was anything like money. At that time in Mesopotamia, seed for grain was given to farmers. After the harvest, the farmers returned the grain seeds together with a small premium.
The forerunner of modern bank credit as we know it today originated around 400 BC in Greece. Pasion, the most famous banker at the time, kept other people’s savings in the port of Piraeus and invested it. Or rather: he lent the money entrusted to him to third parties. From these he demanded 10 to 12 percent interest for his services.
The who’s who of credit
For those involved in credit transactions there are different names, which can be a little confusing. Ultimately, however, it is always a matter of two parties: the one who gives and the one who takes. This duo can have different names:
- Lender & Borrower is the most common term used in banking.
- Creditors & debtors: Actually easy to remember: The creditor believes he will get his money back. The debtor is the one who has debts.
- Creditor & debtor: The terms come from accounting: The creditor is the one who, for example, gives a company goods that have not been paid for. Debtors are those who are in debt to a company, for example, customers who have not yet paid their invoice.
- Probably the most important prerequisite for this system is trust: The whole thing wouldn’t work if the person who gives something to someone else didn’t believe they could get it back. That’s why the credit has its name: The name is derived from the Latin word credere, which means “believe” or “trust”. So if you have ever wondered where the strange term “creditor” comes from in connection with financial matters: Voilà! It is the person who believes that he will get his lent property back.
How credit works today
The basic principle has not changed much since Passion’s time in ancient Greece. Of course everything is more comfortable, faster and safer today. You don’t even have to go to the bank; many banks now offer loans completely online, including the direct loan offered by the Hanseatic Bank in cooperation with the SWK Bank. Here the conclusion of the contract is even fully digital. This means that you can prove your identity online and sign the loan application with your digital signature.
But one after the other. This is how a loan expires today:
1. get a quote: In the first step, you ask the bank for the conditions under which they offer a loan. These are not the same for every customer. The greater the bank’s assessment of the risk that there could be problems with repayment, the higher the interest rate. Quasi in return for the higher risk that the bank takes.
Particularly wealthy customers with high monthly incomes accordingly receive the best terms for loans – although they are the ones who are least dependent on them. Those who earn little or have a fixed-term employment contract usually have to pay higher interest rates because the risk for the bank is higher. Some banks generally do not grant loans to the self-employed.
2. credit check: before offering you a loan, the bank will obtain information about your creditworthiness. Simply believing in the borrower’s payment morale is usually no longer enough for creditors today. Instead, data from credit agencies such as Schufa are used. The better the creditworthiness, i.e. the better the credit rating, the better the conditions the bank offers. If the credit rating is below a certain score, it becomes very difficult to obtain a regular bank loan.
You must agree to the credit assessment when you request a quotation, usually by checking a checkbox. If you do not give this consent, you will usually not receive a credit offer. Nowadays, the check itself is done digitally, so the bank has the information it needs in a very short time and can prepare an offer.
3. credit offer: After the bank has received the key data for the planned loan – including the loan amount, term, your monthly income – and checked the creditworthiness, it submits a loan offer to the customer. Or it rejects the customer because the risk is too great. How long you have to wait for this decision depends on the bank in question. Some are very quick to check the application, other banks need a few days before the offer comes. With the direct credit of the Hanseatic Bank you will find out immediately whether your credit request is approved and under which conditions.
The offer states at what interest rate you will receive the desired loan and how high the monthly instalment will be.
4. apply for a loan: If the offer is accepted, sign it and it will be returned to the bank. In the meantime – as with the Hanseatic Bank – this is possible completely online with digital signature. But it is also possible in the classic way on site in the branch or by printing out the application, signing it and sending it to the bank by post.
For security reasons you have to prove your identity when applying for a loan. To do this, you present your identity card at the branch; for online loans, you use the Post-Ident procedure or identify yourself via video chat. The bank will also ask you to provide some other documents to prove that you can pay the instalments:
- Copies of the latest current account statements
- Copies of recent pay slips.
What are the requirements for a loan?
Ultimately, it always depends on the bank in question under what conditions it grants a loan. But there are some conditions that must be met for any bank loan:
- Minimum age 18 years.
- principal residence in Germany
- as a rule: a permanent employment relationship and no longer during the probationary period
- adequate credit rating with Schufa and other credit agencies
5. disbursement: once the bank has received the documents in full and everything has been checked, the credit is paid out to the current account specified in the application. How long it takes for the money to be in the account varies from bank to bank. With modern online loans, it usually takes only a few days from application to transfer, whereas with classic applications on paper it usually takes a little longer.
6. repayment: Shortly after the money is in the account, the repayment begins. In the loan agreement, a monthly installment has been fixed, which you pay to the bank month by month. This also includes the interest on the loan. This means that at the end of the term you have paid back the borrowed money including interest and are free of debt.
If you unexpectedly have more money available during the term of the loan than you thought, you can make so-called special repayments – i.e. you can repay an additional amount in addition to the instalment. What this means is that you are free of debt again more quickly and you pay less interest on the loan because you do not borrow the money for so long.