A bank only grants a loan if it can be sure that the borrower will repay it within an agreed period of time.
Therefore, the lending bank can provide collateral in its favor in the event that the borrower becomes insolvent or simply fails to meet the loan obligations (e.g., payment of the loan installment or interest). Depending on the creditworthiness and the amount of the borrowed amount, different means of security can be considered. In many cases, the bank does not just require security but a combination of several securities – for example pledging the salary, taking out credit insurance, and pledging property (mortgage security), securities accounts, or a building loan contract.
It is important for borrowers that the amount of collateral required is also a matter of negotiation and that all agreements on collateral required must be recorded in the loan agreement.
Since loans are usually to be serviced from current income, banks require you to pledge your salary by default. In the case of an “open” pledge of salary, your bank will also inform your employer and thus secure a certain execution rank (priority notice). In the case of a “silent” salary pledge, on the other hand, your employer will not be notified in order to save you any inconvenience.
If you subsequently no longer meet your obligations under the loan agreement, the entire loan claim is usually due. In this context, you will usually be asked by the bank to agree to the garnishment of salary, giving you a period of 14 days, whereby silence is considered consent. If you object to the seizure, the bank will file a lawsuit and request a judicial execution.
A mortgage (lien on a property) is entered into the land register by means of a pledge order. Several consecutive creditors are entered in a hierarchy one after the other in the land register. The banks usually register their loans as a maximum amount of silent second mortgage (e.g., 130 percent of the loan amount) because they also want to secure the interest, expenses, and other costs. The borrower usually has to bear all the fees and notary costs associated with the land register entry.
In some cases, it is sufficient for the bank if a pledge document that can be registered is deposited with the bank. This saves you considerable costs for entry into the land register. However, the bank can have the lien entered into the land register at any time (e.g., if your income or financial situation has deteriorated). You can also negotiate the amount of the lien or only partial incorporation of the lien (e.g., to the extent of 50 percent). This allows you to save costs since a land register entry fee of 1.2 percent of the registered lien amount has to be paid upon incorporation.
After the loan has been repaid in full, you can apply to the land register for the cancellation of the mortgage. The borrower bears the cancellation costs. If the debtor does not repay the loan secured by the mortgage, the bank can apply for the auction of the real estate in the court execution proceedings. The mortgage creditors are satisfied in rank from the proceeds.
Banks often also require the conclusion or provision of insurance to cover specific risks (e.g., death, disability, unemployment), which can have a negative impact on the ability to service the loan if they occur. The guarantee usually takes the form of restricted transferability (blocking payment of the insurance proceeds) or pledging of the insurance claims.
Consider to what extent individual insurance benefits are required and to what extent. Check whether you already have an insurance cover so that you do not need to sign a new contract. The opportunity is gladly used to sell additional products that go beyond the actual need for protection. Occasionally only a single insurance product is offered at all. Therefore, obtain alternative offers for comparison purposes.
Protection against death is of particular importance in connection with loans. There are different forms of insurance in this regard. What they all have in common is that the amount of the premium depends on the desired coverage amount, the age of the insured person, their gender, and their state of health.
Insurance coverage against death
Credit Residual Debt Insurance
In the event of the borrower’sborrower’s death the credit balance insurance will settle the outstanding loan balance. Residual debt insurance is often (especially for smaller loan amounts) but not always the cheapest form of protection. Therefore, be sure to ask for offers from life insurance policies.
Some banks, such as the Santander Consumer Bank, automatically offer residual debt insurance with the loan agreement, in which a one-time premium for the entire term has to be paid at the beginning. As a rule, this is added to the loan amount and makes the loan significantly more expensive. Our experience shows that there are often cheaper insurance policies from other insurance companies. If you have paid a one-off premium for the credit balance insurance and repaid your loan early, you must cancel the insurance separately. You will then receive a proportionate refund of the insurance premium.
With this variant, the insured takes out risk life insurance with a certain sum insured, e.g., 100,000 euros with a term of 20 years, for example. In the event of the insured person’sperson’s death, the outstanding loan balance, e.g., EUR 54,000, is paid by the insurance company to the bank. The remainder of the insurance benefit of EUR 46,000 goes to the beneficiary named in the insurance policy or if no regulation has been made in this regard, to the legal heirs.
If you no longer need the insurance cover, for example, because you repay the loan early, you must cancel the insurance separately.
Inheritance and life insurance
In contrast to pure life insurance, in the case of combined life and life insurance, an insurance benefit is also agreed upon for the event of survival. The premium is significantly higher because, in addition to the portion for protection against death, it also includes a “savings portion” for the endowment benefit. It is often recommended to take out endowment and life insurance as collateral for the loan, with the note that in the case of pure life insurance, you would not get anything back when the contract expires, and the premium was. Therefore, de facto paid for nothing. On the other hand, with endowment and life insurance, you would get the premiums plus profit back and would also be protected in the event of death.
At first glance, this seems very attractive. Many consumers believe that the premiums you pay are invested like a savings account that they can access at any time. In fact, the cost of the insurance benefit in the event of death, as well as brokerage commissions and administration costs, are deducted from the premium paid, and only the remainder is assessed. This results in the sum insured in the event of survival. Only this is guaranteed. Any profit forecasts made at the beginning are non-binding.
As a rule, it makes more sense and is also more transparent to separate protection against death and savings (provision for the event of survival). In general, it makes more economic sense to make higher repayment installments for the loan than to save something at the same time. As a rule, the loan interest is higher than the income from the endowment insurance. From our consulting practice, it is known that loan seekers whose financial situation is already strained and who have short-term financing needs (e.g., regulation of an overdraft) are repeatedly advised to take out long-term endowment insurance (term: at least ten years). In addition to the credit installments, unnecessarily high insurance premiums have to be spelled out in such cases,
In addition, you are more flexible with residual credit insurance and life insurance if the loan is terminated earlier and life protection is no longer required. In the case of endowment and life insurance, the premature termination (surrender) of the insurance contract is often associated with considerable financial disadvantages.
Banks are increasingly offering an insurance package in connection with a loan, which also includes protection in the event of unemployment. The premiums are a lot more expensive as a result, and it should be noted that the benefit in the event of an insured event is linked to certain criteria: e.g., you must have been employed by the same employer for at least 12 months and have become unemployed through no fault of your own. As a rule, the payment of the credit installment is only accepted for a certain period of time, e.g., 12 months.
Unemployment insurance premiums are either payable monthly, or a one-time premium is charged at the beginning of the loan. A monthly charge is much cheaper for the policyholder and usually ends with the insurance contract. The single premium leads to enormous initial costs, which usually have to be financed in addition to the loan and lead to higher fees and interest. In addition, there are no consistent regulations on how the insurance is to be settled in the event of early loan repayment and what repayment the policyholder receives.
When granting a loan, banks are happy to have a blank bill of exchange signed by the borrower or any guarantor. Significant points (such as the amount of the bill of exchange or the due date of the bill of exchange) remain blank. The bank may complete the bill of exchange at a later date in accordance with the relevant bill of exchange declaration. The bill of exchange declaration, which can already be included in the loan agreement or signed separately by the borrower, regulates the conditions under which and to what extent the bank may complete the bill of exchange.
The advantage of the bill of exchange for the bank is that a bill of exchange payment suit can be filed with the bill of exchange. The bill of exchange action is characterized by the fact that
- In the event that the borrower or bill of exchange guarantor does not raise any objections to the bill of exchange payment order (WZA) issued by the court on the basis of the lawsuit, the bank can obtain an execution title more cheaply and quickly.
- The bank can lead to execution for security from the time the complaint is served on the borrower or guarantor. This means that the bank can access the borrower’sborrower’s assets very quickly, at least for security purposes. Without action for payment by bill of exchange, the bank would basically have to wait until the final conclusion of the court proceedings before taking any executive steps.
Guarantee – A risky friendship service
In the case of a guarantee, the guarantor undertakes to pay the debt for which he has guaranteed to the creditor if the debtor fails to meet his obligation (liability for a material third-party debt). The guarantee declaration between the creditor (bank) and the guarantor must be in writing for the guarantee to be effective.
If the borrower gets into financial difficulties and can no longer pay, then the guarantor has to “step in” for him.
“I urgently need a bank loan! Can you vouch for me?” You
may be asked this question, for example, by a close family member or friend. In such cases, it is usually very difficult to refuse this “friendly service.”
But remember: A thoughtless decision and a simple signature can have fatal consequences. The assumption of a guarantee is never a “mere formality”! It often leads to financial ruin, destroyed friendships, or strained family relationships.
Do not sign any guarantee prematurely! If you decide to do so, limit your liability to a maximum amount! If necessary, only commit yourself to the extent that does not jeopardize your own financial existence and livelihood. Please note that guarantees are reported to the KSV. Your personal creditworthiness is thus limited since the guarantee is valued as part of the credit assessment, like a loan you have taken out yourself. As a result of the “friendship” of a guarantee, you may not be able to fulfill your own loan request.
The forms of guarantee:
- Guarantee as “guarantor and payer.”
- This form of guarantee is the most common in practice and is mostly used to secure bank loans. It can be very serious for the guarantor. He is liable as an “undivided” joint debtor for the amount for which he has vouched. When the debt falls due, the bank has the right to take immediate action against the guarantor. She can choose to use the borrower, the guarantor, or both at the same time.
- “”Normal”” guarantee
- In practice, the normal guarantee only plays a subordinate role. With this form of guarantee, the guarantor can only be prosecuted if the creditor has unsuccessfully reminded the main debtor. There must be a reasonable period of time between the reminder and the claim against the guarantor.
- Default guarantee The default
- guarantee is the “mildest” form of guarantee. In the case of a default guarantee, the creditor must first take all reasonable steps to obtain payment from the principal debtor. This includes suing for the claim and conducting the execution unless the debtor cannot be found or the execution is completely hopeless.
- In the event of a divorce: joint credit liabilities of spouses generally continue to exist in the event of divorce. Upon request, the court can declare that one of the spouses is only liable as a guarantor. This application must be filed with the court within one year of the divorce becoming final.
An amendment to the Consumer Protection Act (KSchG) came into force on January 1, 1997. It has introduced new protective provisions for consumers who assume liability as guarantors for someone else’s debt. The protective provisions apply not only to guarantors but also to co-debtors and guarantors.
They also apply to co-debtors and guarantors since the banks, especially in the case of spouses, have in recent years made the spouse jointly liable as a co-debtor and not as a guarantor. This was obviously intended to avoid the case law on the ineffectiveness of guarantees for those without income or assets from close relatives.
“Judicial right of moderation”
In practice, there are major problems because family members with no income or assets are repeatedly “persuaded” to provide a loan guarantee or joint liability.
Since January 1, 1997, the judge has been able to reduce or waive the obligation of a guarantor or co-debtor “taking all circumstances into account” if it is grossly disproportionate to the financial capacity of the guarantor or co-debtor.
Examples of circumstances to consider are:
- the carelessness
- the predicament
- the inexperience
- the excitement
- or the dependency of the guarantor on the principal debtor at the conclusion of the contract.
Information obligation of the bank
If a consumer assumes liability as co-debtor, surety or guarantor, the bank must inform him of the (poor) economic situation of the borrower if it recognizes or has to recognize that the main debtor will probably not (fully) fulfill his debt. If the bank does not comply with this obligation to warn, the guarantor is only liable if he would have accepted the guaranty without this information.