Borrowing money from a financial institution, whether it’s a small loan or a large one, is often tied to fulfilling a wish. This article explores six common types of credit available in Germany, their features, and potential drawbacks.
Types of credit in Germany
- Overdraft credit
An overdraft credit, or “Dispokredit,” is granted to bank customers upon request when they have a regular income. It typically allows overdrawing up to three monthly salaries. Markus Latta from the Bavarian Consumer Service explains, “An overdraft credit provides bank customers with quick and uncomplicated liquidity.”
However, overdraft credits come with disadvantages. “It’s comparatively very expensive due to high credit interest rates, which currently average 12.3% per year,” says Latta. Moreover, it can become a debt trap since there are no fixed repayment rates or guidelines, and customers can repeatedly use it from their regular cash flow in their current account.
- Installment loan
An installment loan, also called a consumer or personal loan, involves fixed repayment rates and a fixed term. “For some types of installment loans, the use of the loan amount is earmarked,” Latta notes. This type of loan is suitable for purchases such as a kitchen or washing machine, or for financing a large celebration or vacation. The interest rate for an installment loan is usually fixed.
The drawbacks include the risk of over-indebtedness, as multiple credit agreements can be taken out in parallel. Additionally, some providers offer interest rates based on creditworthiness, meaning poorer credit scores result in higher interest rates. The current average interest rate for an installment loan is 7.61%.
- Car loan and balloon financing
A car loan is a specific type of installment loan for purchasing a vehicle. It also has fixed repayment rates and a fixed term. “Depending on the provider, special repayments or early redemption are possible, as with installment loans in general,” explains Latta.
Balloon financing is often offered for car loans. Compared to a regular car loan, the monthly repayment rates are lower, but a high final payment is due at the end of the term. This is because the low monthly rates don’t contribute to full loan repayment.
The disadvantages of balloon financing include a higher interest burden due to slower loan repayment and the potential need for refinancing at potentially worse conditions to cover the high final payment.
- Instant loan
An instant loan also features fixed repayment rates and a fixed term. The advantage is quick approval from the provider, with no long waiting times for the customer. “An instant loan is not earmarked; the money is available for free use,” says Latta.
However, the quick credit decision and free use of the loan amount come at a price. “Providers sometimes charge higher interest rates than for earmarked installment loans,” the expert explains.
- Mortgage loan
A mortgage loan, often referred to as construction financing, is used for building, buying, or renovating a house or apartment. The credit institution agrees with the customer on a fixed term, fixed interest rate, and fixed installment. It’s possible to conclude long terms with fixed interest rates of over 20 years.
The drawbacks include the requirement of a prepayment penalty for early repayment and the lack of a special right of termination until after ten years. Additionally, customers must agree on special repayment options with the bank at the time of contract conclusion, as this is not possible at a later date.
- Student loan
This is an installment loan where the loan amount is earmarked for financing studies. “Unlike BAföG, a student loan is independent of the parents’ income,” says Kathleen Altmann from the Association of German Banks. No loan security is necessary.
Altmann advises seeking advice from multiple providers and inquiring about the loan’s flexibility for semesters abroad or vacation semesters. She also recommends checking for university-specific offers. A potential drawback of student loans is the stipulation of how long the studies may last at maximum.
In conclusion, when considering any type of credit, it’s crucial to compare offers from multiple providers. As Kathleen Altmann from the Federal Association of German Banks in Berlin advises, “Interested parties should always inquire about credit conditions from several providers and compare them with each other.”
