Consumer credit – how it works
In short, all loans are referred to as consumer loans taken out by private individuals. In recent years, however, so many loan names have been pounded out of the ground that apparently there are separate loans for each person and subject group. Loans for the self-employed, real estate loans, car loans, vacation loans, consumer loans, consumer loans – in this jungle only bank employees can often find their way. In summary, a consumer loan is taken out by a private person in order to borrow a large amount of money. The reason for the loan is decisive for the type of loan. All types of credit are roughly divided into
- Dedicated and
- uncommitted loans
The conditions of a consumer loan are usually set, whereby the credit institutions can determine details themselves. It is therefore worth comparing several offers. This is the only way to find the cheapest interest so that you can save money. In addition, earmarked loans are often cheaper than untied loans.
Dedicated consumer credit
Some consumer loans already have their purpose in the name: car loan, wedding loan, real estate loan in the area of mortgage lending. All these loans have in common that they are earmarked. This means that the bank knows exactly what the borrowed money is used for. In most cases, the object to be financed is deposited as security. If there is a default, the item will be confiscated by the bank. For example, if you want to buy a new car but don’t have the money, the bank will offer you a car loan. Some banks require the Kfz-Brief as security, but this is often not necessary. At dealer banks, however, it is not uncommon for the vehicle registration document to be retained until your debt has been repaid in full. The purchase contract for the car shows the bank that you actually bought the vehicle. In the case of construction financing,
A dedicated consumer loan is generally cheaper because the risk of default is considered less by the banks. Since the item itself is deposited as security, it can be confiscated in the event of an incident. This also includes so-called point-of-sale loans, ie loans that are taken out directly from the dealer.
Untied consumer credit
As the name suggests, this type of consumer credit is not tied to any purpose. So you decide yourself what you use the money for. However, this means an increased risk for the bank, as it does not know what you are doing with the money and there is no certain equivalent. Therefore, other collateral is needed. The bank tries to compensate for this risk with higher interest rates. A typical consumer credit is, for example, the uncommitted overdraft facility. If you overdraw your account, the bank usually has no knowledge of the purpose for which you have used the money. Unfortunately, the overdraft is very expensive. Even if the interest on this consumer loan is settled on a daily basis, interest rates of up to ten percent are not uncommon. In some cases, higher interest rates are also possible.
A calculation example compares the interest on a dedicated consumer loan with an unbound installment loan.
The double interest rate can significantly increase the cost of a loan. For an uncommitted loan, interest rates increase almost twice. It is therefore always worth keeping interest rates as low as possible.Table: Comparison of costs of earmarked and untied credit
Pay attention to a low interest rate and, if possible, use a dedicated consumer loan. This saves you the cost of consumer credit interest.
When consumer credit is not tied up, you sometimes dig deep into your pocket.
Legal requirements for a consumer loan
As with any contractual agreement, a consumer credit must also be recorded in writing. You cannot rely on oral appointments that were made on the side. They are not valid. The consumer credit and the terms of the contract are sealed with the signature of both contractual partners. By signing, both parties agree to the terms of the loan. All conditions are laid down in the contract. In addition, some points are mandatory. They must definitely be listed in the contract. This includes:
- Effective interest rate
- Net loan amount
- borrowing rate
- Fees and other borrowing costs
- repayment arrangements
A cancellation policy must also be included. You can object to and withdraw from the contract up to 14 days after the consumer credit has been concluded. Overdraft facilities are excluded from the listed criteria.
Consumer credit: Which conditions are relevant?
The terms on which you take out consumer credit is up to you. This means that you can freely choose the amount of the loan, fixed interest rates and the amount of the repayment rate. The bank sets the interest rate. This depends on the amount of the loan you want to take out and the requirements you have. If your creditworthiness and creditworthiness are good, the bank usually offers you a lower interest rate than if you have to fear default due to a lack of liquidity. The bank will request credit check information. You can determine the term of the installment loan yourself. It is influenced by the loan amount. Both together influence the amount of the monthly rate. Invest some time to set the monthly rate. It will accompany you throughout the entire term and determines the monthly financial burden. At a higher rate, you will be debt free earlier and save interest. However, you should choose the repayment rate so that you can pay further financial burdens if, for example, the washing machine gives up.