Often, a larger purchase should or must be financed by a loan. But before the borrower signs the contract, he should take a close look at it.
Whether car, new furniture, washing machine and refrigerator, home or debt restructuring: There can be many different reasons for a loan. And the banks make their offers tasty with low interest rates, attractive terms and various extras.
However, it sometimes remains with the full-bodied advertising promise and many a loan agreement turns out in retrospect as a nasty and above all expensive surprise.
It is therefore important that the borrower does not rely on the first offer, but always seeks several offers and compares them with each other. If he has decided on a loan offer, he should take the time to examine the loan agreement in peace.
In principle, the following applies: The borrower should not sign the loan agreement until he has understood all the contract details .
If something is unclear to him, he should ask the provider and let explain the appropriate point. Finally, the borrower enters into an obligation through the loan. And he has to fulfill this obligation. Premature and ill-considered decisions can therefore literally cost the borrower dearly.
Of course, the borrower will not be able to quickly acquire extensive knowledge of the lending business. But that’s not necessary. The borrower is on the safe side, if he pays attention to the crucial cornerstones and knows the classic stumbling blocks. The five main points of the loan agreement, which the borrower should consider before signing, are summarized in a two-part overview.
Point: Does the loan fit into the budget at all?
First and foremost, the borrower should realistically calculate whether he can pay the loan installments at all. After all, he will have to spend part of the household’s income on the loan every month or even every month. If he is just making ends meet, it will be hard to repay the loan properly. For what if the borrower loses his job? Or get sick? Or the rent, the electricity and other fixed costs rise? Or another fate hit him? Can he still pay the loan installments anyway?
In addition, the borrower should look to see if the loan may provide a higher final installment. In general, the borrower is better advised to choose a longer term and therefore lower loan rates. This makes the loan expensive, because the borrower pays more interest. But the monthly burden is lower. And when money is left, the borrower can still make special repayments.
And another thing: for banks, loans are a lucrative business. For no reason, they do not refuse a loan application. After all, they are losing a profit. Therefore, if the bank does not want to lend to the lender, they should understand the cancellation as a warning and reconsider their financial situation.
Point: Do the details in the credit agreement agree?
The loan agreement commits the bank to provide the loan amount on the agreed terms. In return, the borrower agrees to repay the loan as agreed.
The contents of a legally valid credit agreement are derived from the German law of obligations. The corresponding regulations are from § 488 in the Civil Code. The borrower should pay particular attention to the following information:
- Contractor : In the credit agreement, the names and addresses of the lender and the lender must be available. If the borrower takes the loan together with another person, their data must also be included in the loan agreement. But beware: All persons signing the loan agreement are fully liable for the proper repayment.
- Type of loan and loan amount : The loan agreement must specify the nature of the loan. Because different regulations apply to the various types of credit, in terms of disbursement, repayment and use. The amount of the sum over which the loan is completed, of course, must also be in the contract.
- Term and repayment : The credit agreement stipulates how long the loan will run. It also determines how many loan installments the borrower pays and how high the loan installments are.
- Interest : The loan agreement sets out the interest rates for the loan. All cost factors that affect the loan are summarized in the so-called APR.
- Collateral : Banks require different collateral , depending on the type of loan and the loan amount. In a conventional installment loan, for example, a salary assignment is usually agreed as collateral. In contrast, a real estate loan is usually secured by a mortgage. A life insurance policy, which the borrower transfers to the bank, or a guarantor are further examples of possible collateral. The credit agreement states whether and which collateral has been agreed. In addition, the loan agreement regulates when the bank can avail itself of the collateral and that the borrower gets back the collateral after the repayment of the loan.
- Termination Conditions : The credit agreement states when and how the loan can be terminated. On the one hand, it is important for the borrower whether he can terminate the loan agreement early. On the other hand, he should check when the bank can terminate and generally what happens if he can not pay his credit installments.
- Credit : The bank can and will check the creditworthiness of the borrower. She is even obliged to do that. By a corresponding contractual clause, the borrower agrees to the credit check. If the credit rating is not quite as good, the bank will apply a risk premium to hedge. If the creditworthiness is insufficient, the bank will reject the loan application. It should be said that the borrower should not fall for false promises. If a provider offers a loan, although the borrower is in debt or has no income, he is usually not serious.
- Other agreements : In addition to the basic agreements, a loan agreement may contain many other agreements. These may, for example, refer to additional products and other extras.
Even though it is difficult and the contract is multi-page, the borrower should carefully examine all details in the loan agreement. By signing the loan agreement, the borrower confirms that all data is correct and that he agrees with all agreements. Since the general terms and conditions of the bank are usually also part of the loan agreement, the borrower should also take a look at it.
A loan agreement must be understandable and contain clear rules. For this, contract models have been introduced which are valid throughout Europe. The contract templates should ensure that the borrower can understand both the terms of the loan and the cost of the loan. Therefore, the borrower should be skeptical if the lender presents him a cumbersome and difficult to understand credit agreement.
More financial tips. Guides and guides:
- Overview: The bank needs these documents for a real estate loan
- FAQ for the purchase of real estate on a leasehold property, Part 1
- Manage open claims and avoid collection costs – 5 tips
- Checking account becomes more expensive – what to do?
- Remaining debt insurance for loans – information and tips, Part 2
- Remaining debt insurance for loans – Information and tips, Part 1