Actively search for the right loan

Calculate how much money you need. Then consider what monthly instalments you can afford. The simplest way to do this is to prepare an income and expenditure budget in which your regular earnings can be seen in relation to your fixed and variable expenses. Free budget planners can be found for this online, for example on consumer centre websites. Using this income and expenditure budget, you can go out in search of the right loan.

As a general rule: loans that appear quick and convenient are usually expensive.

Credit institutions demand high interest rates for convenient loans such as account overdrafts, e.g. arranged overdrafts (Dispositionskredite). Overdrafts on current accounts that have not been arranged but are tolerated by banks are usually the most expensive form of consumer loan that a bank will offer. For this reason, we recommend that you only use an arranged overdraft for as short a time as possible and, even then, for only small amounts of money. Make sure that you steer clear of unarranged overdrafts (Überziehungskredite) altogether.

Utilising the credit line of a revolving credit card is often just as convenient and equally as expensive. 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 look around as you can often find more reasonable alternatives.

Contact more than one provider

The interest rates for consumer loans can vary by several percentage points from one provider to another. For loans that depend on your creditworthiness (Bonität), you will have to obtain information that has been personally calculated for you. You can do this by making a loan conditions enquiry (Kreditkonditionenanfrage) or by making an application 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

If you want to compare loans, make sure that you focus above all on 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.

Making your choice of a loan provider on the basis of the “two-thirds interest rate”

When making your choice of 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 example calculations used in the advertisements are designed to attract attention and are generally based on the lowest effective annual interest rate. You must bear in mind that, even if your credit rating is good, you will most likely not be actually offered this interest rate. However, the provisions under section 17 of the German Regulation on Price Indications (Preisangabenverordnung – PAngV) require loan providers to use loan conditions in their example 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 a greater degree of orientation through the labyrinth of offers than any of the other example 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 tends also 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” (Zweidrittelzins).

Please remember: loan advertising, like all forms of advertising, is aimed at gaining new customers. Bear this in mind when out 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 conditions that at first sight sound too good to be true.

Divulge as little of your personal data as possible

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

For example, the contract conditions of some loan brokers entitle them to pass on consumer data not only to banks and Sparkassen but also to other loan brokers. This makes 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, e-mails 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 in retail, for example in stores or in online-retail, tcan differ greatly. The range of offers 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 a retailer with financing options offered by other retailers, or instalment loans of banks and Sparkassen, 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.

As regards cash payment prices in retail, the differences in the price ranges can be considerable, depending on the purchase item. Make sure that you include other additional costs, such as costs for delivery and assembly, in your price comparison.
In the end, an acquisition based on a retailer’s offer of zero percent financing can turn out to be more expensive than a purchase at another retailer offering you a consumer loan based on interest payments...

For example:

Example 1: different cash payment prices and different interest rates

Important to note once again is that loans that appear quick and convenient 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, despite good creditworthiness. The differences are noticeable. It can therefore pay to take out an instalment loan directly with your bank or savings bank rather than a loan arranged through a retailer. Another examplel:

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) (sometimes also known as residual credit insurance (Restkreditversicherung)). Check very carefully whether you really do need an insurance for a loan that lies in the region of several hundred or a few thousand euros. If you decide that you do need such an 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 remember: the costs of residual debt insurance and the financing of 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 subject to the borrower taking out residual debt insurance, the statutory requirements state that these costs need 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 uncleared 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 or convert uncleared amounts ex post into other finance products. Banks and Sparkassen are increasingly offering flexible elements when selling consumer loans.

These offers might sound attractive at first. However, anyone wishing to make use of this flexibility is advised to keep an eye on the extra costs, fees and interest that have to be paid for these options. Furthermore, it is advisable to exercise discipline and rigorously monitor and keep a tag on your income and expenditure. For in everyday life it is far easier to keep track of your finances if you are paying fixed monthly instalments. You can easily become confused if the instalments and payment dates are flexible..