After disbursement, you pay the loan back on a monthly basis in equal instalments. The maximum loan amount depends, among other things, on your creditworthiness and can be up to 100,000 euros, depending on the bank.

As security for the repayment of the loan, the banks often demand that you assign your salary as collateral in the loan agreement (Gehaltsabtretung). The credit institution is thus authorised to demand payment of the assignable amount directly from your employer if you have problems repaying the loan. A transfer by way of security (Sicherungsübereignung) is usually agreed for car loans. This means that the customer transfers the legal ownership of the newly acquired car to the bank financing the purchase. The customer has unrestricted use of the car but may only sell it once the loan has been repaid.

You pay interest to the bank for providing an instalment loan. This is geared to the market interest rate, i.e. the refinancing rate of the credit institutions. The conditions of the instalment loan also depend on your creditworthiness and the collateral that you furnish.

For repaying the loan, the bank and the customer agree a fixed instalment that is usually paid monthly.

For which customers might an instalment loan be suitable?

An instalment loan might be suitable for you if you require a larger amount of money all at once – for example, in order to buy something expensive like a new car.

The shorter the term of the instalment loan, the higher your monthly payment. A longer term lowers the monthly instalments, but makes the loan altogether more expensive.

Ask yourself before signing the loan agreement how much you can afford to spend in the way of regular instalments and check carefully whether you really can make the repayments as agreed.

What risks are associated with an instalment loan?

Risk of overindebtedness: If, owing to a sudden loss of job for example, you cease paying (or are unable to continue paying) the instalments until the end of the contract term, or can only pay partial amounts of the instalments, there is a risk that you could become overindebted. We recommend that you seek advice from a debt advisory bureau if it becomes clear that you will not have enough money to cover your ongoing expenses.

Risk of negative Schufa score if loan agreement breached: A customer breaching the conditions of the loan agreement and, for example, delaying payment or making incomplete payments of the instalments runs the risk of being given a negative score by the German central credit reference agency Schufa. The Schufa report (Schufa-Auskunft) often plays a key role in a bank’s decision whether to grant a customer a loan in the future and which interest rate to demand. It can also be of significance if you want to rent a flat.

Where can I take out an instalment loan?

Information and advice can be obtained at the branches of the credit institutions, online or by telephone at the respective provider. This is also where you can sign the agreement for your instalment loan.

If you would like to pay for something via an instalment loan – be it a new washing machine or a new car, for example – many specialist retailers offer their own financing schemes. Here, too, it can prove worthwhile to compare the conditions offered by the retailer with those of other providers.

We recommend that you obtain and compare several offers and that you take a close look at the conditions before signing a loan agreement.

The interest rates vary from bank to bank. If you want to compare the various offers of the credit institutions, make sure that you focus above all on the effective interest rate. This is because, unlike the nominal interest rate, the effective interest rate takes into account not only the terms of repayment and, where applicable, the disbursement rate, but additionally includes other costs such as brokerage costs. The best way to gain a really meaningful comparison is by obtaining several offers that have been calculated for you personally.

Credit institutions are not allowed to charge a separate processing fee for an instalment loan – unless the fee was freely agreed between you and the bank. This is based on a decision of the Federal Court of Justice (Bundesgerichtshof) in its judgements of 13 May 2014 (reference numbers BGH XI ZR 170/13 and BGH XI ZR 405/12).

The credit institution is obliged by law to provide you with information on all costs and fees and on the nominal interest rate and the effective annual interest rate.

Furthermore, the bank must inform you about all other contractual conditions, such as the terms of repayment and conditions for terminating the loan, any penalties for early termination if you would like to pay off the loan before the end of the term, or your entitlement to a loan repayment plan.

Which obligations must I fulfil if a credit insitution grants me an instalment loan?

• To sign an agreement on an instalment loan as sole debtor you must have your place of residence in Germany and must be at least 18 years old. This means that students and vocational trainees of full age can also take out such a loan provided they have evidence of regular income. Otherwise, the banks demand a co-creditor (the parents, for example), a guarantor, or that collateral is furnished.
• You must evidence your salary payments and disclose your incoming and outgoing payments and regular financial burdens so that the credit institution can check your ability to pay.
• You must consent to the bank obtaining a Schufa report on your creditworthiness.
• You might need to provide the credit institution with collateral. This can be done by assigning your salary as collateral.
• You need to name a reference account, generally your current account, into which the bank can transfer the money you have borrowed.
• You must make interest and redemption payments in accordance with the conditions of the loan agreement. You are responsible for ensuring that the bank receives the repayments agreed for your instalment loan on time – e.g. monthly or quarterly, depending on the agreement.

Can I prematurely repay an instalment loan?

You are allowed to repay an instalment loan at any time – either in whole or in part. If, as is usually the case with instalment loans, a repayment date and fixed interest rate were defined in the loan agreement, the bank may however charge a penalty for early termination. This penalty may not exceed the following amounts:

• 1% of the amount that has been repaid early or 0.5% of the amount that has been repaid early if there is no more than a year between the early repayment date and the agreed repayment date,
• the amount of interest that the borrower would have paid between the date on which the amount was repaid early and the agreed repayment date.

In what way are providers of instalment loans supervised?

Domestic banks require authorisation from BaFin for conducting credit operations. German banks are supervised by the Deutsche Bundesbank and BaFin and, if they exceed a certain size, also by the European Central Bank (ECB) within the scope of solvency supervision.

BaFin does not check whether the credit institution is offering you an instalment loan at favourable conditions or whether the interest rates being demanded are appropriate. BaFin is also not responsible for checking the contractual provisions.