If you want to make a major purchase, go on a trip around the world or build a house, you often need outside capital. A bank loan is the best way for many consumers to borrow quickly and easily. This enables borrowers to fulfill their wishes and then pay off the loan in installments. This guide explains what forms of bank credit exist, what costs consumers have to expect and what needs to be considered when applying.
The essentials in brief
- Bank loans are funds made available by credit institutions.
- There are different types of loans that can be used depending on the needs.
- The total cost of a loan is always shown in the effective interest rate.
- Consumers have to meet different conditions to take out a bank loan.
- Cheap loans can be found with the Good Finance loan calculator.
What is a bank loan? Definition and forms of loan
The term “credit” is derived from the Latin word “credere”, which means “trust”. This means the transfer of funds or material resources in the confidence that they will be returned. A loan is characterized by the fact that a lender makes financial resources available to a borrower and charges an additional fee in the form of interest. The borrower repays the loan amount including interest to the bank within a pre-determined period. If the borrower repays a constant rate over the entire term in order to pay off the loan in full, this is referred to as an annuity loan.
The term “bank loan” basically describes any form of loan that is provided by a credit institution. Consumers can also borrow money from private individuals. However, this procedure can be associated with some risks and difficulties, especially when it comes to friends or family members.
What types of bank loans are there?
The most common bank loans are installment loans, which are available with and without a specific purpose. As a rule, consumers take up sums of money of around 5,000 to 50,000 USD and can use them for any purpose, for example for a trip around the world or for furnishing a new apartment. In addition, there are other forms of loan that are usually subject to a purpose limitation. At Good Finance, consumers can compare the following loans in addition to the conventional installment loan and then apply to banks:
- Car loan : With a car loan, consumers can finance a new or used car. As a security, the bank usually keeps the vehicle registration document until the last installment has been paid off.
- Construction and real estate financing : Real estate loans enable the construction or purchase of property. The land charge is usually considered as security. The bank loans then usually run for several decades, with a remaining debt outstanding at the end of the first rate fixation phase. For this, follow-up financing is agreed accordingly when the time of the end of the term approaches.
- Debt rescheduling : Borrowers can reschedule existing loans into a new loan. It always makes sense when the new loan is cheaper than the old one. However, it must be noted that the termination of the old loan can incur costs. Merging several smaller loans into one large loan can also be recommended. This ensures clarity and helps to continuously pay off the debt.
How is a bank loan granted?
The granting of loans usually follows the following scheme:
- Application by the borrower.
- The bank checks the creditworthiness and other credit requirements.
- Offering with the credit terms (interest, repayment terms) based on the application.
- Signature of the contract by the borrower.
- Payment of the loan amount within a few days.
Conditions for obtaining a bank loan
To get a bank loan, borrowers usually need to meet the following conditions:
- Age of majority : Applicants must be over the age of 18.
- Residence : Applicants must have a permanent residence in Germany.
- Creditworthiness : Many banks require good creditworthiness. To do this, they send an inquiry to Credit Bureau. The credit agency informs them, among other things, about the borrower’s previous payment practices.
- Income : Applicants must have regular enough income to cover the installment. With a low income, it is advisable to register a second borrower.
- Equity : Some types of loan require borrowers to bring equity. In the case of construction financing, around 30 percent of the total costs should be financed with your own funds.
- Collateral : Applicants must provide collateral for large amounts of funding or to benefit from a lower interest rate on a bank loan. Real estate loans even require this. Collateral for a bank loan can include, for example, guarantees, land charges, life insurance or transfers by way of security.
As part of the application process, borrowers must submit some documents to the bank. Among other things, these serve to be able to check compliance with the credit requirements:
- Proof of income : As a rule, applicants must submit the last three payslips. Freelancers and the self-employed have to present business evaluations, tax assessments and bank statements. Pensioners submit the last three pension notices.
- Proof of employment : Proof of permanent employment increases the chance of the loan. Trainees may have to provide evidence that they will be taken on after their apprenticeship.
- Account statements : Some banks may request bank statements from the past few months to measure the solvency of applicants.
- Self-disclosure : The self-disclosure contains information regarding the monthly income in relation to all payment obligations. Examples of this are telephone contracts, rental payments or existing loans.
- Collateral : The documents refer to declarations of assignment or evidence of the existence of the collateral. In the case of a surety, some banks require the guarantor’s proof of salary.
- Application : The signed application can be sent to the bank electronically or by post.
Not all documents are necessary for every type of loan. For example, with an installment loan of up to around USD 20,000, the borrowers do not have to provide any collateral if their credit rating has been rated as good.
Conditions: What do consumers have to look out for in a bank loan?
Applicants should not immediately apply for the first loan offer. A good bank loan is characterized by other factors, which often only become clear in the small print:
- Interest : Every bank loan has an interest rate. However, what is important for consumers is the effective annual interest rate, because in contrast to the borrowing rate, this includes all costs incurred. The processing fees associated with the bank loan are also taken into account.
- Special repayment : The special repayment allows the bank loan to be paid off more quickly. This is not always free or can be done at regular intervals. Consumers who take out a bank loan should make sure that they can make a special repayment regularly and free of charge.
- Repayment : The repayment is based on the loan amount, the bank loan interest rate and the term. Consumers should choose a reasonable monthly rate so that they can repay the loan quickly without the risk of financial constraints. Some banks make it possible to temporarily suspend repayment in the event of payment difficulties.
Fees: What does a bank loan cost?
How high the interest rate calculated for the bank loan depends on various factors. In particular, this includes the current market interest rate level, own creditworthiness and, last but not least, the lending bank. The loan amount and the term also affect the interest.
Borrowers can lower the bank loan interest rate with the following tips:
- the shorter the loan term, the lower the interest rate
- additional guarantees (second borrower, guarantor) lower interest rates
- a comparison of banks makes it possible to find a cheap offer
Note: Consumers who want to benefit from favorable conditions carry out a credit comparison at Good Finance. To do this, they enter the required amount of funding, term and purpose. You will then receive an overview with the appropriate offers. As soon as you have decided on a loan, interested parties can quickly and easily make a loan request. Upon request, a personal advisor is available free of charge on the phone.
In addition to the effective interest rate, there may be additional costs associated with the loan – such as fees for residual debt insurance or life insurance, which some banks charge when providing large amounts of finance. In the case of construction finance in particular, the commitment rate must also be taken into account. These additional costs are incurred if customers do not use the money immediately, but only at a later date.
Bank loan: example of the cost
- Financing amount: 5,000 USD
- Term: three years
- Borrowing rate: 6.5 percent
- Processing fee : 150 USD (one-off)
The monthly rate based on the credit information amounts to USD 157.84, so the total expenditure after three years is USD 5,682.33. The cost of the bank loan including the processing fee is 682.33 USD.
What are the advantages and disadvantages of a bank loan?
Probably the greatest advantage of a bank loan is that it is relatively easy to raise a sum of money with the appropriate credit rating. Consumers can thus fulfill wishes or invest in their future, for example by buying their own home. Due to the monthly repayment, the purchases can be made immediately, the borrowers do not have to save many years first. Bank loans also make it possible to bridge financial bottlenecks.
The disadvantage of a bank loan is the fact that the financing is always associated with additional costs. In addition, the borrowers have a payment obligation that often lasts for many years. Borrowing also creates a risk for consumers: the loss of a job and the associated lack of income or rising interest on follow-up financing can threaten financial livelihood if the rate is too high.
Basically, if you want to make purchases today for which there is currently no capital, you can finance them with a bank loan. The main disadvantage – borrowing costs – can be reduced by borrowers, especially when comparing different loan offers. This is possible, among other things, with the free and anonymous comparison calculator from Good Finance.