Actively search for the right loan

Start by working out much money you need. Then think about the monthly instalments you can afford. The simplest way to do this is to prepare an income and expenditure budget comparing your regular earnings with your fixed and variable expenses. Budget planners are available free of charge online for this, for example on consumer centre websites. Once you have this income and expenditure budget, you can search for the right loan.

A rule of thumb is that banks charge relatively high interest rates for convenient loans such as account overdrafts, i.e. arranged overdrafts (Dispositionskredite). Current account overdrafts that are unarranged but tolerated by the bank may be subject to even higher interest rates. If necessary, overdraft facilities may be suitable in individual cases to bridge short-term liquidity requirements. You should try to avoid letting your account get any further overdrawn altogether.

You can also easily use the credit line of a regular or revolving credit card. These are credit cards with a partial payment function in which the largest part of the amount utilised is spread out over several months rather than being collected from your current account in the full amount at the end of the month. Some card issuing institutions charge relatively high interest rates for open amounts on credit card accounts. We therefore advise you to regularly check your credit card statements – and thereby avoid the risk of sliding into the red without realising it.

It pays to shop around as you can often find more reasonable alternatives.

Contact more than one provider

Interest rates for consumer loans can vary by several percentage points from one provider to another. For loans that depend on your credit rating (Bonität), you will have to obtain information that has been personally calculated for you. You can do this by making a loan terms and conditions enquiry (Kreditkonditionenanfrage) or by applying for a loan. This is the only way for you to establish clarity about the interest rate that would be charged for the loan you are interested in.

Comparisons based on the effective annual interest rate

You should pay particular attention to the effective annual interest rate (Effektivzins). Whereas the borrowing rate (Nominalzins) takes into account the monthly repayment in particular, the effective annual interest rate must include additional other costs, such as brokerage costs or processing fees. All providers must use the same formula when calculating the effective annual interest rate. This interest rate therefore shows you most clearly how much the loan will actually cost you each year.

Choosing a loan provider on the basis of the “two-thirds interest rate”

When choosing a loan provider, the following information contained in the loan advertisement might prove useful:

• The interest margin stated for consumer loans by the loan provider, and
• The amount of the effective annual interest rate used by the provider in the “two-thirds interest rate” (Zweidrittelzins).

The model calculations used in the advertisements are designed to attract attention and are generally based on the lowest effective annual interest rate. You should consider that, even if your credit rating is good, you will most likely not be actually offered this interest rate. However, the provisions of section 17 of the German Regulation on Price Indications (Preisangabenverordnung – PAngV) require loan providers to use loan terms and conditions in their model calculations on the basis of which they may expect to conclude at least two-thirds of the loan agreements signed as a result of the advertisement. The “two-thirds interest rate” is therefore also not binding. But, together with the interest margin, the effective annual interest rate stated on the basis of the expectations of the providers offers consumers better guidance through the labyrinth of offers than any of the other model calculations used in the advertisements.

You usually need to search the advertisement very carefully in order to find this information. The highest possible interest rate is often shown in small print. The same applies to the “two-thirds interest rate”, which also tends to be shown in small print rather than attract attention. Loan providers often also refer to it as a “representative example in accordance with section 17 of the PAngV”, or the “two-thirds interest rate”.

Please remember: loan advertising, like all forms of advertising, is aimed at gaining new customers. Bear this in mind when searching for information on loans. We therefore recommend that you take a critical approach when encountering references on websites, comparison sites, in social media, flyers or brochures to negative interest rates or other loan terms and conditions that at first sight sound too good to be true.

Be careful when providing personal data

When making a loan terms and conditions enquiry or a loan application, you must disclose data on your financial situation so that your individual credit rating can be checked and assessed. When searching for loans online, make sure that you know who will receive your data before divulging such sensitive personal information. Read the contract terms and conditions on the provider’s website so that you know what your data is being used for.

For example, the contract terms and conditions of some loan brokers entitle them to pass on consumer data not only to (savings) banks, but also to other loan brokers. This can make it difficult for you to check what is happening with your data. Moreover, you might have to prepare yourself for an influx of phone calls, emails or post from other loan brokers that have received your data. Putting an end to such unwanted contacts can sometimes be frustrating.

Financing offers in retail: look closely at the cash payment prices

Financing offers by retailers, for example in high street stores or in online retaill, can differ greatly. The range of offerings includes loans, instalment purchases, deferral agreements or other forms of financing assistance for a fee or free of charge, e.g. “zero percent financing” (Null-Prozent-Finanzierung). If you want to compare financing offered by one retailer with financing options offered by other retailers, or instalment loans of (savings) banks, the important thing is to focus not only on the financing offer. We also advise you to unravel the tangle of “cash payment price” and “financing”, and assess each component separately.

When it comes to cash payment prices for retail purchases, differences in the price ranges can be considerable, depending on the item being purchased. Make sure that you include other additional costs, such as costs for delivery and assembly, in your price comparison.

In the end, a purchase based on a retailer’s offer of zero percent financing can turn out to be more expensive than a purchase from another retailer offering you a consumer loan based on interest payments.

For example:

Example 1: different cash payment prices and different interest rates

Again, convenient loans are often expensive loans.

Particularly in the case of some instalment loans arranged by retailers, the interest rates can lie in the low or even higher double digit region, even if you have a good credit rating. The differences are striking. It can therefore pay to take out an instalment loan directly with your (savings) bank rather than a loan arranged through a retailer. Another example:

Example 2: same cash payment price, different interest rates

As you can see, it really does pay to do your own calculations (or have someone do them for you) and to compare! This applies as much to online retailers as to high street store operators. Do not allow yourself to be put under pressure, and calculate all the alternatives in your own good time.

Residual debt insurance: is this really necessary?

Beware of offers to take out residual debt insurance (Restschuldversicherung) (also known as payment protection insurance (Restkreditversicherung)). Check very carefully whether you really do need to insure a loan of several hundred or a few thousand euros. If you decide that you do need this sort of insurance, we recommend that you check the offer documents and, in particular, whether the residual debt insurance you are offered does indeed cover the risks that you wish to insure.

Please note: The costs of residual debt insurance and financing for these costs can make the loan considerably more expensive. If residual debt insurance is taken out on a voluntary basis, i.e. without the lender granting a loan that is conditional on the borrower taking out residual debt insurance, the law says that these costs must not be included in the effective annual interest rate of the loan.

Ask the provider to state the costs of the loan with and without residual debt insurance. Do not let anyone rush or put pressure on you!

After taking out a loan: keep track of your finances

Make sure to keep track of any outstanding debts and pay them when they are due. In particular, many loans arranged through retailers offer you the flexibility to vary your payment instalments, to defer payments, bundle them or convert outstanding amounts subsequently into other finance products. Banks and savings banks are increasingly offering flexible options when they sell consumer loans.

These offers might sound attractive at first. However, anyone wishing to take advantage of this flexibility is advised to keep an eye on the extra costs, fees and interest that have to be paid for these options. Additionally, you should be very disciplined and constantly monitor and update your own budget. That’s because, in everyday life, it is far easier to keep track of your debts if you are paying fixed monthly instalments. You can easily become confused if the instalment and payment dates are flexible.