As an alternative to bank loans, there is the option of borrowing money from relatives or friends. A classic example are grandparents who advance the money for the education of their grandchildren. If there is enough personal trust, you can forgo a credit check.
Fast and uncomplicated processing as well as no processing fees from the bank are additional advantages. Generally, the interest rates are considerably lower than at the bank because the lender’s main incentive consists in doing the person concerned a favor. Another perk: An ongoing consumer loan with a bank reduces the creditworthiness for further projects. However, credits from private individuals are not taken into account.
However, such a “courtesy loan” may comprise a number of risks. First, the personal relationship may suffer to a certain extent. Especially when it involves large sums of money, serious disputes can arise easily that may lead to the end of a friendship. Second, the borrower is not as well protected as they would be with a bank loan. Certain consumer protection regulations apply to banks that private individuals do not have to adhere to.
For this reason, you should seek professional advice even in relation to a friendship loan. A written loan agreement, that outlines and regulates the most important aspects, is strongly recommended.
The conditions for a personal loan
If you are considering a personal loan, you should compare the terms of different providers. Here, the most important factors are the duration of the loan, the interest, the repayment installments and any special payments that may apply.
The duration of a personal loan usually depends on the bought item, meaning the longer the life of the purchased good, the longer the loan term. A loan that was used to buy a car then has a term of approximately 5 years, for example.
The interest is based on the credit rating – among other things. This means that you can usually negotiate lower interest rates if you have a higher credit rating. A distinction must be made between the nominal interest rate (or debit interest rate) and the effective interest rate. The effective interest also includes all ancillary costs, such as processing fees or an account management fee. Therefore, the effective interest rate should always be taken into account for a comparison. Depending on the creditworthiness, an effective interest rate of 3-10% (as of February 2020) can be expected for a consumer loan.
The repayment rate depends on the term, the interest as well as the amount of the loan. Usually, a monthly installment is paid, which is made up of the repayment contribution and interest. Before taking out a consumer loan, you should check what monthly rate you can afford. Here, making a list of your monthly income as well as all expenses can help. A sufficient cushion for unforeseen expenses and loss of income should definitely be taken into account.
Credit check for a personal loan
What does the bank look at during a credit check? Basically, every bank has slightly different criteria. As a rule, the following points are considered when determining the credit rating:
- Monthly net income: Income after tax (excluding overtime, vacation or Christmas bonus);
- Household account: Income in comparison with current expenses. The amount that is available for repayment results from the excess. However, financial reserves for unforeseen events must also be planned for;
- Type of employment: The self-employed are generally classified by banks as having a lower credit rating because their income fluctuates more. Permanent employment is best for creditworthiness;
- Existing debt and repayment obligations;
- Reserves and assets;
- Marital status, children, maintenance obligations;
- Housing situation: Location, type of residence (owned or rented?);
- Additional collateral: For example, life insurance, surety, residual credit insurance, insurance against occupational disability;
- Data from a creditworthiness database: For example, the credit protection association (KSV), CRIF or Bisnode.
Personal loan: Check conditions carefully and compare offers
A personal loan can be helpful to finance major purchases. However, you should always take a close look at the conditions. Compare different offers with regard to the effective interest rate and ask about any special payments – for example when changing contracts.
If you are lucky, you can get a cheap personal loan from relatives or acquaintances: Here, you still should carefully clarify the conditions and draw up a written contract. Personal loans that sound too good to be true without KSV are not advisable, as they are usually not serious offers.