In order to take out an online loan or mini loan, it is necessary to conclude a loan contract with a recognized credit institute. All conditions of the loan are recorded in it. However, it is advisable to draw up a loan agreement not only in public finance, but also on loans from private individuals in order to avoid problems. But not every loan contract is valid, especially in the business area, there are legal requirements that must be met. Each contractual partner must receive a copy of the signed loan agreement and the general loan terms for their own documents. This should be kept until the end of the contract period.
What is a loan agreement?
There are basically two parties to lending – the borrower and the lender. The lender leaves the other party an amount X or an object. If a loan agreement is concluded, the borrower undertakes to repay the equivalent or the loan amount to the lender. The form in which the repayment is made is set out in the loan agreement. There are both loans that are paid in one amount and those that are repaid in installments.
All legal details of the granting of the loan are recorded in the loan contract. If such a contract is concluded between the bank and the consumer, there are many legal requirements that must be complied with. If the bank violates one of the regulations, the borrower can revoke the contract at any time.
How long does a loan contract last?
As soon as both parties have signed the loan agreement, it is valid. This only applies if the legal regulations have been observed. Important factors that should not be missing in the loan agreement are:
- Term of the contract
- Monthly installments
- interest rate
- Payment date and repayment dates
The credit agreement is only terminated when the recipient of the money has paid back the full amount plus interest. In theory, this point is reached at the end of the contractually agreed term. However, there are exceptional situations, such as early repayments or defaults in payments that shorten or extend the term.
Is every loan contract valid?
There are loan agreements that are considered illegal and therefore invalid. They stipulates the general conditions to which the credit institution and the borrower must adhere. With the strict regulations, legislators are trying to prevent one of the two contracting parties from gaining a major advantage. The following two examples show when a loan agreement is invalid:
1. The lender knows about the financial hardship of the borrower and uses it for his purposes. The lender wants to enrich himself and demands disproportionately high interest rates that are not proportionate to the loan amount.
2. The situation is somewhat more difficult if the bank requests a co-applicant who has no assets. If the loan agreement is signed by this person but there is no income, it is often classified as immoral. A financial overload is considered to be given if the income is not even enough for the interest.
But there are other reasons why the loan contract is invalid:
- there are no revocation instructions or legal instructions included
- Footnotes and additions were added later
- Footnotes or additions are spongy
- the intent of a contractor was fraudulent
- the loan was taken out by a minor
What should borrowers look for in the contract?
When a loan agreement is concluded, the consumer should be familiar with it. Hidden fees, for example, are a common point that consumer centers are well aware of. The following key data should be checked when entering into a loan agreement:
- the conditions such as interest rates, possible special repayments
- unexplained fees or incidental costs that include valuation costs
- contractual fixing of the loan term
- Obligation to take out residual debt insurance, yes or no?
- in the case of high loan amounts, the fixed interest period should also be examined.
There are clear differences in the interest rates of individual banks. A comparison of several lenders is therefore vitally important and can easily be done online. So you can quickly tell how good the conditions are and whether the interest rate is appropriate.
That should be in a loan agreement:
1. The contracting parties
Both contracting parties are to be listed in writing with all personal data. A legal representative must sign for minors.
2. The sum
The loan amount is the amount or equivalent that is made available to the borrower.
3. The payout
If a loan is taken out from the bank, the contract must state how the payment will be made. Depending on the type of contract, the total amount can be paid out in individual stages or in one sum. If it is a matter of fact, the time of delivery must be recorded.
4. The term
The term is the time that the borrower is given to settle his debt. If the term is considered in combination with the total amount and the interest, the monthly rate can be calculated. With shorter times, interest costs are low, but monthly expenses are high. Those who do not have sufficient financial liquidity are better served with a longer term.
5. The interest and the interest rate
The bank incurs costs for the loan, which are redistributed to the borrower. Both the interest rate and the interest due date must be recorded in the loan agreement. It must also be recorded how long the fixed interest rate is valid. Interest belongs to every loan, with the exception of personal loans, which can also be given without interest. When a bank grants a loan, it wants to make a profit. The credit system is one of the best earning opportunities for banks. A distinction is made between the borrowing rate and the effective interest rate. The latter corresponds to the borrowing rate plus the incidental costs. A processing fee for the granting of a loan is not permitted by law, so the borrowing rate and interest rate hardly differ per year.
With some loan offers, a fixed interest rate is set for a certain period. This means that even if the market interest rate changes, there is no adjustment. If such a fixed interest phase is not specified, the bank can adjust the interest rate flexibly.
6. The type of repayment
Most loans are considered annuity loans. This means that the total amount is repaid in monthly installments until the total amount has been repaid. An alternative option is to pay the full amount at the end of the period or to leave an outstanding balance. The repayment terms must be set out in the loan agreement.
If the repayment is made in installments, the contract must stipulate the intervals at which the installments must be paid. Which form of repayment is chosen must also be recorded. Annuity repayment and installment repayment are possible. Annuity repayment differs in that the same amount is paid on each payment date. In the case of installment repayment, however, the amount changes; only the repayment amount is identical. The total rates decrease continuously if the rates are paid regularly.
If the consumer is in arrears, default charges may apply. Dealing with payment defaults must be contractually stipulated. It is advisable to issue a direct debit authorization, because this way it cannot happen that the consumer falls behind.
7. The collateral
If a large loan amount is required or if the consumer does not have a positive credit rating, it is necessary to deposit a security. These can be securities, but also the vehicle letter. Thanks to such security, the bank has the option of using it in the event of default. For example, vehicles can be auctioned or sold if the loan amount is not repaid.
The monthly basic income is the greatest security. Some banks therefore assume that an existing employment relationship must have existed for a certain time. The creditworthiness is automatically increased if there is a regular income above the attachment limit. Income that does not exceed the monthly seizure allowance cannot serve as security for the bank. This income cannot be attached in the event of a default and therefore does not offer the bank any security.
But even if the credit rating is not perfect, further guarantees can ensure that the desired loan is still granted. These include real estate, property, plant and equipment, deposits from the building society contract or insurance. It is important that these collateral be recorded in the loan agreement.
8. The termination
If there is a defined term, neither party has to terminate the loan agreement. In this case, the contract is terminated when the entire debt is paid. However, there are a number of reasons that can lead to early termination of the contract. These reasons must be recorded in the contract. Possible reasons for termination include:
- lack of conformity
- lack of collateral
Any interest on arrears must also be recorded in the contract. If the borrower does not pay his monthly installments, the lender can insist on the payment of default interest. The possibility of special repayment must also be recorded in the contract. Can the customer make special repayments? Can rates be suspended?
Notice of termination must always be given in writing, for example to the bank’s office. Verbal agreements or contract terminations are not valid. A certain form must also be maintained. So both parties have to prove that the notice of termination actually took place and was properly delivered. The way of termination by registered mail is suitable for this. The return receipt serves as proof that the notice of termination has been given. A termination by fax is also possible at many banks. The exact terms of termination must be found in the contract.
9. The cancellation policy
Every credit agreement is based on basic legal types. The lender has a duty to communicate these basics to the borrower. However, it should be noted that revocation is only possible in exceptional situations. The obligation to cancel begins on the day on which the borrower is given the cancellation instructions. When the contract is concluded, both parties sign that information has been provided in this area; the conditions will be given to the borrower in writing.
10. The extraordinary termination
Both parties can terminate the loan agreement extraordinarily if the contractual obligations are not fulfilled by the other party. If the borrower can also name a relevant reason, he generally has the option to terminate the loan contract.
11. The revocation
The borrower can cancel or withdraw from the contract within 14 days after the contract has been signed. The right of withdrawal applies from the point at which the information in this regard has been made available to the borrower. If the lender does not provide any information, the consumer can subsequently request it. Then there is a new deadline, this time lasting 30 days.
12. The limitation period
Claims that can be made on the basis of a private loan agreement are time-barred after three years. This only applies if no payment has been made or a reminder for non-payment has been made. If no reminder is issued, debt collection is no longer possible after three years due to a lack of a reminder.
How do private and business loan contracts differ?
There are clear differences between a private loan agreement between individuals and a business loan agreement.
The private loan agreement:
- the statute of limitations expires after 3 years
- Cancellation is possible at any time without prepayment penalty
- Private loans are not reported to Credit Bureau
- no legal regulations for the drafting of contracts
- Loan amount is not earmarked
- Creditworthiness in the private environment is rarely checked
- higher loan amounts are often not possible
- usually no collateral required
- In private, interest-free loans are possible
The business loan agreement:
- The limitation period is 3 years, and 10 years if the reminder is sent
- A prepayment penalty is due at the fixed interest period
- hardly any credit opportunities with negative Credit Bureau
- commercial chalk contracts are protected by law
- high loan amounts are almost always earmarked
- Creditworthiness must be positive
- good creditworthiness enables very high loan amounts
- The bank can request collateral
- Banks do not grant interest-free loans
Why is a loan contract necessary at all?
The loan agreement is a protection and security aspect for borrowed money. Both rights and obligations of both parties are contractually regulated and can be requested at any time. It is also advisable to conclude a private loan contract for personal loans. There are some patterns online that just need to be downloaded.
However, the help of an ombudsman or consumer protection is only available for loan contracts that have been made public. Private contracts remain unaffected.
How do I recognize a dubious loan offer?
There are numerous, dubious credit providers that can be unmasked quickly. 100,000 USD instant loan with low interest rate without Credit Bureau entry? Such offers sound perfect, but they are smoke and mirrors. Every reputable lender needs the certainty that the repayment will be made on time. A credit check is therefore not only annoying, but should also protect consumers from the debt trap. The only banks that do not conduct a Credit Bureaucheck are foreign banks. But protection is also necessary here, for example through an above-average salary.
Checklist to determine if rip-off is present:
There are a few ways in which even inexperienced consumers can find out whether they are on a loan shark or whether a loan offer is legitimate. Consumers should pay attention to these points:
– The lender charges an agency fee in advance before the loan is approved. As a rule, such offers are never used to broker a loan; only the broker earns from the fees.
– It is offered in addition to the credit agreement or even exclusively an economic consultancy agreement.
– At the same time, the loan provider requests the conclusion of a building society contract or insurance. Such offers are rip-offs.
– The borrower should be able to contact the lender at any time without calling an overpriced hotline.
There are numerous fraudsters who want to enrich themselves with the financially weak. Loans for Hartz 4 recipients are promised as well as housewife loans without Credit Bureau, and around 1/3 of all loan offers are therefore considered to be dubious. As soon as an urgent loan is sought that does not require a Credit Bureau query or collateral, dubious offers are usually created.
Every consumer is therefore advised to read the credit terms carefully and not to fall for enticing offers. A bank does not take any risk, it wants to prevent default. Thus, a Hartz-4 recipient does not get a loan with a large loan amount, since repayment is not possible even within 120 months.
Conclusion on the loan agreement:
The credit agreement protects consumers and lenders in a serious way. A loan without a contract is not advisable. Especially in the bank taking a loan always harbors risks, because the friendship can suffer from payment defaults and other problems. Before taking out a loan, a comparison must always be made so that the best offer is found.