For example in the amount of 500 to 5000 USD. These are particularly suitable for small purchases. For smaller amounts, the bank’s credit facility is used instead of taking out a loan. However, this can be associated with considerable interest costs, so that taking out a small loan is worthwhile if you have financial needs of up to 5000 USD. In this case, the small loan replaces the overdraft facility.
What are small loans? An overview
Small loans do not differ significantly from installment loans. Here too, redemption and interest are paid in the form of monthly installments. These are due from the payment of the small loan. However, the terms of a small loan are less than the periods for higher installment loans. The loan terms for a small loan are usually a maximum of 24 months.
The transition from a small loan to an installment loan is fluid. Many banks do not explicitly differentiate between these two types of credit. They offer both products under a common name.
Difference loan term
Short terms are a characteristic of small loans. Therefore, they are primarily suitable for bridging short-term financial bottlenecks or for the purchase of consumer goods.
- Delimitation small loan – micro loan
Small loans have to be distinguished from small loans. Small loans amount to a few hundred USD and are mainly granted in developing countries. The term microcredit is also common. Small loans are largely uncommon in industrialized countries. They are rarely granted by banks, since banks incur fixed costs for lending that cannot be adequately covered with such minimal loans.
- Interest and sums
The interest on small loans is comparatively low. The reason for this is that the sums are manageable and are normally easy to repay. For banks, the income from a small loan is in a reasonable ratio to the effort. The prerequisites for obtaining a small loan are not as high as for an installment loan that includes a larger sum. Many banks give small loans even if the customer is not eligible for larger loans due to the lack of financial resources. Trust plays an important role in the award.
Under what conditions can a loan be taken out?
Although a small loan is a rather small sum, banks have requirements for the loan to be granted. After all, the granting of small loans is a business and a source of revenue for the banks, so that defaults should be avoided. The guidelines for lending are the same for most banks. An important prerequisite is that the person wishing to take out a loan is of legal age. In addition, the main residence must be in Germany. Second homes can easily be abroad.
- Residence in Germany
The decisive factor is the place of residence where the person is most of the time. In most banks, a German bank account is a prerequisite for granting a small loan.
- Advantages with house bank
Some financial institutions only grant the loans if the customer also has the account with this bank.
Banks assess their customers when lending according to various criteria. One of these criteria is creditworthiness. It reflects whether the banking customer will be able to repay the money or whether there will be problems in meeting the liabilities.
- Permanent employment
The creditworthiness is assessed on the basis of various social criteria, such as the existence of a permanent job. For this reason, many banks place demands on credit customers that they must have a fixed employment relationship and that they should no longer be in the trial period. Ideally, the bank customer has a permanent employment contract that guarantees a regular income.
With this requirement, the bank wants to ensure that the monthly installments of the repayment can be paid over the entire repayment phase. When applying for a small loan, the customer must prove the amount of his income based on the employment contract, the bank statements or the wage statements of the employer.
Small loan for the self-employed?
The banks place higher demands on the self-employed and freelancers when applying for a small loan. As these professional groups do not earn a regular income, they have to prove their financial situation through profit and loss accounts or balance sheets.
Anyone who has stable sales as a self-employed person can easily get a loan. When processing the application for a small loan, the bank checks the creditworthiness using a credit report. This is done, for example, via a Credit Bureau query.
If the customer has a bad Credit Bureau score or if there are negative entries in the Credit Bureau file, then the application for a loan is very likely rejected. When granting a loan, banks also require that customers take out and use the loan for themselves.
The money makers want to prevent the money from being passed on to a third person who may not be creditworthy and therefore cannot repay the loan as intended.
Example calculations or example cases – these costs arise with a small loan
There are several key factors in small loans:
- the desired loan amount
- the interest rate
- the amount of the installments
- as well as the type of payment in installments
If, for example, a loan amount of 5000 USD is chosen, then at an interest rate of 7.5% over a period of three years, 155.53 USD must be repaid monthly.
If a lower percentage is possible (5%), the regular rate is only 1.49.85 USD per month. Many small loans do not have a long term, they are repaid over a maximum of two years.
If the term is 2 years and there is an interest rate of 5%, then 219.36 USD must be repaid monthly. With a very favorable interest rate of only 3%, monthly installments of 214.19 USD arise. It is striking here that the difference in the interest rate has only a minor effect on the monthly installments. The term of the loan has a much stronger influence.
What special forms/sub-forms are there?
Small loans can be given to different groups of people. Depending on the target group, several sub-categories of small loans are distinguished, such as small loans for pensioners, for the unemployed, for the self-employed or small loans, for which no Credit Bureau query is made.
- For pensioners
Small loans for retirees are a specific category of loans. Pensioners receive a fixed income from their pension. This is security. Nevertheless, they pose a risk to banks, since the statistically still to be expected lifespan can be short depending on the age of the applicant. If the borrower dies during the loan term, the bank usually remains on the outstanding claims.
As a result, pensioners often find it difficult to get a loan from a bank. However, some banks offer small loans for pensioners. Due to the limited terms of the small loan amounts, the risk for financial institutions can be calculated. Retirees often have good options for obtaining a small loan if they are willing to take out residual debt insurance. Alternatively, the credit claim can be covered by an existing life insurance policy.
- For the unemployed
Another group of borrowers are the unemployed. The tight household income of unemployed people can quickly lead to financial constraints. One-off charges due to new purchases or expensive repairs become a problem here. Small loans can be a good way to cushion the financial burden. A loan can usually only be granted if the remaining duration of the unemployment benefit exceeds the term of the loan.
In addition, the income and expenditure situation of the credit customer should also justify a loan application. For example, those who have only just become unemployed and who also generate income in addition to unemployment benefit should be able to obtain a loan more easily than a prospective customer whose unemployment benefit is about to expire, which has no other income and is at risk of it, into benefits under the second Social Code (ALG II) slip off. Those who cannot meet the necessary conditions for a loan usually have to accept high interest rates. With these, the lending bank can be compensated for the higher risk.
- For the self-employed
The self-employed can be a risk group for banks. Banks take into account possible payment defaults because the self-employed do not have a fixed, predictable income. Small loans for the self-employed are therefore usually more expensive than corresponding loans for employees. Creditworthiness plays a role in the allocation of credit conditions. Self-employed people who can prove that they are making continuous profits receive small loans on better terms than freelancers or traders who have just started their own business or who have to report losses in their income-surplus bills.
The Credit Bureau information
In the case of ordinary small loans, the bank obtains information from Credit Bureau before granting the loan. Here, financial institutions can find out whether the prospective customer has debts or whether there have been defaults in the past.
Many banks, including those from other European countries, offer Credit Bureau-free small loans. No information about the customer’s creditworthiness is obtained here. The loans are therefore suitable for all those with negative Credit Bureau entries.
However, banks are also looking for security with these non-Credit Bureau-free small loans, for example through very short terms or high interest rates, as well as the demand for proof of income or the requirement of a guarantee.
What are the possible pitfalls of small loans?
In the short term, more and more Germans have to borrow a large amount, for example for a new television, a new washing machine or other suddenly occurring costs. However, caution is advised when retailers, such as electronics stores or furniture stores, offer loans without interest.
These loans are not always free of charge. They don’t just consist of the installments of the borrowed amount. There are also agency fees. These are added up as a surcharge and can make a small loan more expensive than the overdraft facility. The offers with interest-free loans for furniture or electrical appliances can be tempting. However, buyers should still check whether the items are cheaper elsewhere.
Note: pay attention to the effective interest rate!
The effective interest rate shows all costs. Agency fees, bank fees, etc. are also included here. Therefore, it should always be listed with reputable small loan providers.
Credit insurance for small loans
Additional insurance is often offered for the loans. These are non-payment insurance that are particularly recommended to unemployed clients or pensioners. This safeguards the bank, for example if customers can no longer pay the installments due to financial constraints. These types of insurance are useful for the banks, but are associated with additional financial burdens for the borrower.
Insurance premiums must be paid in addition to the installments and can make the loan more expensive. However, anyone who rejects the insurance must expect that the loan will not be granted.
Note: If insurance, then with an independent provider
You will surely get the best price for credit insurance from a provider that is not affiliated with the credit bank. At least you should find out about prices from several providers in advance.
Not multiple loans
It may seem tempting to take out several small loans, for example from different banks. Here, however, there is a great risk that customers will take over financially and will no longer be able to service the credit rates. Anyone taking out a small loan should be able to service the installments even in the event of unforeseen events, such as loss of earnings. Property and asset risks should also be minimized. This means that the items that are bought with the small loan should be secured until the loan is repaid.
Do not set the total too high
In recent years, the trend has been towards higher sums for loans due to the slightly rising price level and the higher cost of living. Small credit is therefore increasingly being replaced by consumer credit. This means loans with a volume of up to USD 75,000. However, the debt that arises from taking out a loan always means responsibility – regardless of the amount involved. It is therefore important to find a reputable provider for the loan. If the providers of the loans already charge fees during the examination phase or if other financial products are linked to the loan, such as building society contracts, caution is important.
Advantages and disadvantages of online lending vs. at a bank
Loans can not only be applied for in a bank branch or at dealers, but also online. The online loans are mostly offered on the web by renowned banking houses. Other providers are direct banks, where many services are only offered online. Since they do not have a branch network and therefore pay less costs, they can offer more favorable conditions and interest rates. However, there is often no personal contact with questions, just a general service hotline.
Advantages of online small loans:
- Available around the clock
Another advantage of online credit is that the online banks are open 24 hours a day. If you want, you can log in late in the evening and apply for online loans, fill out the necessary forms online and the promise is quickly there.
- Immediate feedback
If the test procedure is calculated automatically, interested parties receive the confirmation online after just a few minutes. All that customers have to add is the documents attached as PDF. These are printed out, filled out and sent to the post office with proof of income in order to confirm your identity there using the Postident procedure. The ID is presented here for legitimation. After about five working days, the loan amount appears on the account.
- Short-term special offers
Online loans can not only be applied for quickly, they also change quickly. The offers are offered depending on the season or promotions. A special offer in May may already be out of print in June. Those who access quickly can benefit from favorable conditions.
How does it look at the house bank?
Anyone who turns to the house bank for a small loan instead will receive advice in the branch. Here the interested party can find out immediately whether he is getting the loan or not. An appointment must be made at the bank beforehand. Branch banks add additional costs to the prices of credit products to maintain the branch structures. Interest rates are a little higher here. It can also happen here that the bank advisor insists on taking out residual debt insurance or life insurance to approve the loan.
Such supplementary insurance is not sold online as forcefully. On the web, a loan calculator makes it possible to compare different offers and conditions. The loans from the web are more flexible and offer different interest rates or terms. The offer of the branch banks is often more limited and the advisor will try to agree certain conditions that are favorable for the bank. Nevertheless, it can make sense to seek advice from the bank, especially if not all conditions of the offer are clear and the advisor can answer questions.
What to do if you have bad credit rating?
It is difficult for some consumers to understand why a loan application was rejected. The cause is usually a bad credit rating of the customer or a negative Credit Bureau information. Applications are also rejected if interested parties are unemployed or are only in temporary employment. Even lending to people during the probationary period is too risky for many banks.
Banks become cautious with low incomes or direct debits on the account. If the current account is in the overdraft facility or if bookings show that collection agencies send payment requests against the prospect, customers often do not receive small loans.
Note: It makes sense to request free information from Credit Bureau. There may be unjustified entries here. If the prospect can prove that the entries are flat, it is possible to request that they be deleted. This then improves the Credit Bureau score.