In order to take out an online loan or mini loan, it is necessary to conclude a loan agreement with a recognised credit institution. All the conditions of the loan are set out in the agreement. However, not only in public finance, but also for loans between private individuals, it is advisable to draw up a loan agreement to avoid problems. However, not every loan agreement is valid, especially in the business sector there are legal conditions that must be fulfilled. Each contracting party must receive a copy of the signed loan agreement and the general loan conditions for their own records. This should be kept until the end of the contract period.
What is a loan agreement?
There are basically two parties in the lending process – the borrower and the lender. The lender provides the other party with an amount X or a tangible object. If a loan agreement is concluded, the borrower undertakes to repay the equivalent amount or the loan sum to the lender. The form of repayment is specified in the loan agreement. There are both loans that are paid off in one sum and those that are paid off in instalments.
All legal details of the loan are recorded in the loan agreement. If such an agreement is concluded between the bank and the consumer, there are many legal requirements that must be observed. If the bank violates one of the regulations, the borrower can revoke the contract at any time.
How long does a loan agreement run?
Once both parties have signed the credit agreement, it is valid. This only applies if the legal regulations have been observed. Important factors that should not be missing from the credit agreement are
- Term of the contract
- Amount of the monthly instalments
- Interest rate
- Date of payment and repayment dates
The credit agreement is only terminated when the recipient of the money has repaid the full amount plus interest. In theory, this point in time is reached at the end of the contractually agreed term. However, there are exceptional situations, such as early repayment or defaults on payments, which shorten or lengthen the term.
Is every credit agreement valid?
There are credit agreements that are considered illegal and therefore invalid. Section 138 of the UK Civil Code specifies the general conditions to which credit institutions and borrowers must adhere. With the strict regulations the legislators try to prevent that one of the two contracting parties receives a great advantage. The following two examples show when a loan agreement is invalid:
- the lender is aware of the borrower’s financial distress and uses it for its own purposes The lender wants to enrich himself and charges disproportionately high interest rates that are not in proportion to the amount of credit.
- the situation is somewhat more difficult if the bank demands a co-applicant who has no assets whatsoever. If this person signs the loan agreement but has no income, it is often considered immoral. A financial overload is considered to exist when the income is not even enough to pay the interest.
However, there are other reasons for the invalidity of a credit agreement:
- there is no cancellation policy or legal information included
- Footnotes and additions have been inserted subsequently
- Footnotes or additions are spongy
- the intention of a contracting party was fraudulent
- the loan was taken out by a minor
What should borrowers pay attention to when signing a contract?
If a credit agreement is concluded, the consumer should be well acquainted with it. Hidden charges, for example, are a common point that is well known to consumer centres. The following key data should be checked when concluding a credit agreement:
- the conditions such as interest rates, possible special repayments
- undeclared fees or incidental costs that include valuation costs
- contractual determination of the credit period
- Obligation to have residual debt insurance, yes or no?
- in the case of large loan sums, the fixed-interest period should also be considered.
There are significant differences in the interest rate levels of individual banks. A comparison of several lenders is therefore existentially important and can be done easily via the Internet. This way it can be said quite quickly how good the conditions are and whether the interest rate is appropriate.
This should be included in a loan agreement:
1. The contracting parties
Both parties to the contract must be listed in writing with all personal data. For minors, a legal representative must sign.
2. The sum
The loan amount is the amount or equivalent that is made available to the borrower.
3. The disbursement
If a loan is taken out with the bank, the contract must specify how the disbursement is to be made. Depending on the type of contract, the total amount can be paid out in single stages or in one sum. If it is a material object, the time of handover must be recorded.
4. The duration
The term is the time allowed to the borrower to settle his debt. If the term is considered in combination with the total amount and interest, the monthly installment due can be calculated. Shorter terms incur low interest costs, but the monthly expenses are high. Those who do not have sufficient financial liquidity are better off with a longer term.
5. 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 specified 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 granted interest-free. 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 debit interest rate and the effective interest rate. The latter corresponds to the debit interest rate plus the service charges incurred. A processing fee for granting a loan is not permitted by law, so the debit interest rate and the interest rate hardly differ per year.
With some credit offers, a fixed interest rate is set for a certain period of time. This means that even if the market interest rate changes, no adjustment is made. If such a fixed interest rate period is not fixed, the bank can adjust the interest rate flexibly.
6. The method of repayment
Most loans are considered to be so-called annuity loans. This means that the total amount is paid back in monthly instalments until the total amount has been repaid. An alternative option is to pay the full amount at the end of the term or to leave an open residual debt. The repayment terms must be set out in the loan agreement.
If repayment is made in instalments, the contract must specify the intervals at which the instalments must be paid. The form of repayment chosen must also be recorded. Annuity repayment and repayment by instalments are possible. Annuity repayment differs in that the same amount is paid on each payment date. With installment repayment, however, the amount changes, only the repayment amount is identical. The total installments decrease continuously if the installments are paid regularly.
If the consumer is in arrears, arrears charges may be incurred. The handling of payment defaults must be contractually recorded. It is advisable to grant a direct debit authorization, because in this way it cannot happen that the consumer falls behind.
7. The collateral
If a high credit amount is required or if the consumer does not have a positive credit rating, it is necessary to deposit a security. This can be securities, but also the KFZ Brief. On the basis of such a security, the bank has the possibility to fall back on it in case of payment defaults. For example, vehicles can be auctioned or sold if the loan amount is not repaid.
The greatest security is the monthly basic income. Therefore, some banks require that an existing employment relationship must have existed for a certain period of time. Creditworthiness is automatically increased if there is a regular income above the garnishment exemption limit. Income that does not exceed the monthly garnishment exemption limit cannot serve as security for the bank. This income cannot be garnished in the event of a default and therefore does not provide the bank with security.
But even if the creditworthiness is not perfect, further securities can ensure that the desired loan is still granted. These include real estate, tangible assets, deposits from the building society contract or even insurance policies. It is important that these securities are recorded in the loan agreement.
8. The termination
If there is a defined term, neither of the two parties must terminate the credit agreement. In this case, the contract is terminated when the full amount owed has been paid. However, there are a number of reasons that can lead to an early termination of the contract. These reasons must be recorded in the contract. The possible reasons for termination include
- Late payment
- Lack of conformity
- missing collateral
Any interest on arrears must also be recorded in the contract. If the borrower does not pay his monthly instalments, the lender may insist on the payment of interest on arrears. The possibility of unscheduled repayment must also be recorded in the contract. Can the customer make unscheduled repayments? Can instalments be suspended if necessary?
Notice of termination must always be given in proven written form, for example to the bank’s office. Verbal agreements or contract terminations are not valid. A certain form must also be observed. For example, both parties must prove that the notice of termination has actually been given and duly served. A suitable way to do this is, for example, to send notice of termination by registered mail. The advice of delivery serves as proof that the termination has been effected. Termination by fax is also possible at many banks. The exact cancellation modalities must be taken from the contract.
9. The cancellation policy
Every credit agreement is based on basic legal principles. The lender has the duty to inform the borrower of these principles. It should be noted, however, that revocation is only possible in exceptional situations. The term of the obligation to revoke begins on the day on which the borrower was given the revocation instructions. When the contract is concluded, both parties sign that an explanation has been provided in this area, and the conditions are handed over to the borrower in writing.
10. The extraordinary termination
Both parties are entitled to terminate the credit agreement for exceptional reasons if the contractual obligations are not fulfilled by the other party. If the borrower can also state a relevant reason, he generally has the option of terminating the loan agreement.
Within 14 days after the contract has been signed, the borrower may revoke or withdraw from the contract. The right of withdrawal is valid from the moment the borrower has been given access to the relevant information. If the lender does not provide information, the consumer may request it subsequently. There is then a new period, this time lasting 30 days.
12. The limitation period
Claims that can be asserted on the basis of a private credit agreement are time-barred after three years. This only applies if neither payment has been made nor a reminder for non-payment has been sent. If no reminder is sent, debt collection is no longer possible after three years due to a lack of reminder.
What is the difference between a private and a business loan agreement?
There are significant differences between a private loan agreement between private individuals and a business loan agreement.
The private credit agreement:
- the statute of limitations is after 3 years
- Termination is possible at any time without prepayment penalty
- Private loans are not reported to the Experian
- no legal requirements for the drafting of contracts
- The loan amount is not earmarked
- Creditworthiness in the private sphere is rarely checked
- higher loan amounts often not possible
- usually no collateral required
- private interest-free loans are possible
The business loan agreement:
- Statute of limitation is 3 years, with sent reminder 10 years
- An early repayment penalty is due for fixed-interest periods
- hardly any credit opportunities with negative credit rating
- business chalk contracts are protected by law
- high loan amounts are almost always earmarked
- Credit rating must be positive
- Good creditworthiness enables very high loan amounts
- Collateral may be required from the Bank
- Banks do not grant interest-free loans
Why is a loan agreement necessary at all?
The credit agreement is a protection and security aspect of borrowed money. Both rights and obligations of both parties are contractually regulated and can be claimed at any time. It is also advisable to conclude a private loan agreement for personal loans. There are some samples online that only need to be downloaded.
However, the help of an ombudsman or consumer protection is only available for credit agreements that have been concluded publicly. Private contracts remain unaffected.
How can I recognise a dubious credit offer?
There are numerous dubious credit providers that can be quickly exposed. 100,000 GBP immediate loan with low interest rate without credit rating? Such offers sound perfect, but they are a complete waste of time. Every serious lender needs the security that the repayment will be 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 carry out a Experiancheck are foreign banks. But here, too, security is needed, for example through an above-average salary.
Checklist to determine whether a rip-off has occurred:
There are several ways that even inexperienced consumers can find out if they have been ripped off by a loan shark or if a loan offer is reputable. On these points, consumers would be better advised to listen carefully:
– The lender charges a commission up front before the loan is approved. In such offers, as a rule, a loan is never brokered; only the broker earns money from the fees.
– A business consultancy contract is offered in addition to the credit agreement or even exclusively.
– At the same time, the credit provider demands the conclusion of a building society contract or insurance. Such offers are rip-offs.
– The borrower should always be able to contact the lender without calling an overpriced hotline.
There are numerous scammers who want to get rich from the financially weak. Loans for Hartz 4 recipients are promised as well as housewife loans without Experian. About 1/3 of all credit offers are considered dubious as a result. As soon as an express loan is sought that requires neither a Experian inquiry nor securities, dubious offers are usually made.
Every consumer is therefore urged to read the credit conditions carefully and not to fall for lure offers. A bank does not take any risk, it wants to prevent a default of payment. Thus a Hartz-4 recipient does not get a loan with a high credit sum, because repayment is not possible even within 120 months.
Conclusion to the credit contract:
The credit agreement protects consumers and lenders in a serious way. A loan without an agreement is not advisable. Especially among friends, taking out a loan always involves risks, because the friendship can suffer from payment defaults and other problems. Before a loan is taken out, a comparison must always be made to find the best offer.