Small Loan – The Ultimate Small Loan Guide February 2020

A small loan is a loan with a small amount, one speaks of amounts of not more than 10,000 USD. The term small loan does not officially exist in banking but has become established in recent years because it has been in increasing demand.

Small loan definition

There is no uniform definition of the amount of a loan that can be considered a small loan. Depending on the source, small loans can amount to 500 to 10,000 USD.

If you need some cash at short notice, the type of loan is often an easy solution. Favorable interest rates, short terms and a low monthly charge speak for a small loan. It only takes a few minutes to fill out and submit the application via the Internet – often there is a non-binding commitment after just a few minutes – even at the weekend.

Who can apply for a small loan?

Who can apply for a small loan?

First of all – anyone who is at least 18 years old and of age can apply for a small loan. It is important that the credit rating is correct and if possible you have no negative Credit Bureau entry. The minimum requirements for a small loan are:

  • Resident in Germany
  • at least 18 years old
  • positive & permanent employment is an advantage
  • current loans are irrelevant

The 3 steps to small loans

The 3 steps to small loans

A small loan can be taken out in just 3 steps – the process only takes a few minutes and can be carried out conveniently online from home.

  1. Compare small loans
  2. sign a contract
  3. Get credit / get paid

Step 1:
With the comparison calculator for small loans, you can quickly, easily and easily compare all provider banks with just one look. So you can find the best offer in a few minutes and with just a few clicks. Small loan comparison is a crucial process and should be done thoroughly. There are many loan offers from different banks that are all different. Before making an application, you should therefore make a precise comparison beforehand.

Step 2:
The request is made online via the comparison calculator, simply enter the required data in the form and complete the application process to the end. After just a few minutes you will receive a first message as to whether the small loan can be approved or not. The bank then sends a written contract (by post or email, this varies from bank to bank). The contract must be signed and returned using Post-Ident.

Step 3:
After a first confirmation, the loan contract is sent. This must be signed and sent back to the bank. This is done using the well-known Post-Ident procedure and is free of charge, or the costs are borne by the bank. After the bank has checked the contract for all necessary signatures, payment is initiated.

Small loan comparison

The check of all existing small loan providers is the first of 3 steps to get a small loan. The comparison makes it possible for all banks to check according to the amount of the loan.

The loan agreement

The most important document is the small loan contract. Only when this is signed by the bank will the loan amount be transferred to the specified account. The contract contains all important master data of the borrower, such as name, old age, place of residence and some other data. It is important that all of the information you provide is truthful, otherwise the contract cannot be concluded.

Get the small loan paid out

If the contract has been completed correctly and signed, the loan amount is paid to the account specified in the contract. The banks are very quick to withdraw, so the money will arrive in the account within 1-2 days. No long waiting times – the money is immediately available for free.

Characteristics of a small loan

Characteristics of a small loan

  • No fixed loan amount, but one speaks of a small loan for loans from 500 to approx. 10,000 USD
  • Is used to bridge a financial emergency such as the repair of a motor vehicle or a household appliance (washing machine, dishwasher, multimedia..)
  • Also a cheaper way to balance the overdraft facility of the checking account
  • Short terms with a low monthly charge

Use a small loan

A small loan can be used for many things, if it is a more expensive purchase or modernization, such as a new car, washing machine or multimedia system, this is often paid for with a loan. Your own financial strength is not enough and so the small loan becomes an attractive solution. Low interest and costs, convenient payment in monthly installments and the opportunity to get the money quickly speak for a small loan.

The expiration of a loan application

The expiration of a loan application

The following documents are usually required to apply for a small loan:

  • a valid identity card or passport with a current registration certificate
  • meaningful evidence of the applicant’s income and expenses
  • current bank statements

Depending on the professional status, there are various documents to prove the level of income. For example, employees have to submit their salary statements, pensioners their pension statements and the self-employed or freelancers their BWAs or tax assessments.

The formal check of the loan application is carried out by a clerk

On the basis of the documents submitted, an administrator checks whether he can offer a loan. In this context, he first checks the applicant’s legal capacity. This is when you are of legal age and are not restricted in your mental activity.
If these conditions are met, the bank can grant a loan. However, this does not necessarily mean that the loan application will be met. It should be noted that most banks:

  • provide for a maximum age when granting a loan
  • pay attention to the creditworthiness
  • grant a loan only with a positive Credit Bureau course

Because of these lending restrictions, each loan application is carefully considered. The clerk, for example, checks the information provided regarding the applicant’s income and expenditure for consistency. This is done by reviewing the documents and in most cases only takes a few minutes.
The administrator enters all the data in a program. This then determines whether an applicant would in principle be able to meet his loan obligations.

In addition to this calculation, the application is checked by Credit Bureau, which contains important information. In addition to existing obligations, examples of this include information on the applicant’s previous payment history.
If someone has had a negative impact on other credit transactions in the past, this will be noted by Credit Bureau. As a result, the applicant’s creditworthiness is assessed poorly, which reduces the chances of a positive decision when applying for a loan.

The duration of a loan application may vary

A consumer must meet numerous criteria for successful lending. For this reason, every loan application is carefully examined before lending.
The duration of this examination can vary from application to application. There are various criteria that can significantly influence the duration of the test. The following factors are examples of this:

  • the amount of the loan requested
  • the duration of the term
  • the use of funds
  • the professional status

Usually, a decision on a small loan of 1,000 or 2,000 USD is made within a few minutes. With larger amounts of credit, such as those required to finance a vehicle, a credit check can also take a period of several days. This is particularly the case if an applicant is self-employed or self-employed and therefore does not receive a fixed regular income.

Ways to increase the chances of a positive decision when applying for a loan

There are several factors that can negatively affect a loan application or the processing time for a loan application. It can therefore make sense in individual cases to take measures to increase the chances of getting a loan. Examples of such measures are:

  • the inclusion of a second applicant or guarantee in the loan application
  • the provision of collateral for the loan

The measures listed here reduce the bank’s risk of default. This increases the likelihood of the loan being granted or the processing time for the application in many cases.

Credit Bureau query on a small loan

Credit Bureau query on a small loan

There are numerous credit institutions that offer small loans to consumers. However, not all providers are reputable companies. Therefore, caution is generally advisable for consumers if a provider advertises a small loan without Credit Bureau.
In most cases, providers who do not submit a Credit Bureau request do not grant loans. For this they charge fees for allegedly provided services. Reputable institutes don’t do this. These only incur costs if there is a loan.

Credit Bureau stores data about the consumer

Credit Bureau is a credit agency that stores data about the consumer. This data is, for example, information about:

  • the person (surname, first name, date of birth, gender, place of residence etc.)
  • existing telephone and cell phone contracts
  • existing checking accounts
  • Existing credit cards
  • existing customer accounts in retail and mail order
  • existing credit and leasing contracts
  • different payment behavior
  • the taking of the affidavit
  • the opening of bankruptcy proceedings

In the case of a Credit Bureau request, entries about a person are queried

All credit institutions want to ensure that the borrowers pay back their small loan on time and in full. For this reason, they check the creditworthiness and the previous payment behavior of the applicant. As part of this check, the credit institution generally makes an inquiry to Credit Bureau, which enables credit institutions to obtain important details about the borrower. For example, the requesting bank learns:

  • whether and how many credit cards, checking accounts, cell phone accounts etc. an applicant has
  • whether, in what amount and with what remaining term an applicant has already taken out loans

Although a credit institution learns a lot about consumers through Credit Bureau’s request, Credit Bureau complies with data protection. This happens, among other things, because Credit Bureau basically requests a declaration of consent to query the data and also anonymizes numerous data. For example, the credit institution does not find out any details about the amount of the credit limit.
A Credit Bureau request from a bank only takes a few minutes

If a bank wants to check a person’s Credit Bureau data and there is consent, the request usually takes only a few minutes. This means that a loan officer can quickly process a consumer request for a small loan.
If all the requirements for the granting of a small loan are met and the consumer does not have a negative Credit Bureau entry, the loan application is generally granted. In most cases, a credit-dependent interest rate is offered on the basis of the stored data and the so-called base score, which reflects the probability of default of a loan.

The Credit Bureau request is designed to protect consumers from over-indebtedness

A Credit Bureau request is above all a security for the bank, since such a request enables a bank to better assess the risk of default. It is also a protection for the consumer. This is protected against over-indebtedness by conscientious lending.
A credit cancellation after a Credit Bureau request is a sign that a consumer is unable to meet the obligations from a small loan. Therefore, you should not apply for a loan from a shady provider after a credit cancellation.

Some Credit Bureau data can contain errors

The data collected by Credit Bureau is usually correct and complete. In individual cases, however, it is possible that errors were made in the data collection. For this reason, it can make sense in the event of a negative credit decision to request a self-assessment from Credit Bureau. This gives the consumer all the information about stored data and, if it is not correct, can have it deleted.
Every consumer can obtain information from Credit Bureau once a year free of charge. It should be noted, however, that processing a private person’s request, in contrast to processing a request by a credit institution, is only possible by post and can take a long time.

Loan types and interest calculation

Loan types and interest calculation

When you apply for a loan, you usually speak of an annuity loan. This type of loan is repaid in constant installments. There are other types of loans, these are the installment loan (also known as installment loan or repayment loan) and the maturity loan.

With the maturity loan, as the name suggests, the entire loan amount is due at a certain, previously defined point in time.

To simplify matters, the tables below were calculated with the following values:

  • Loan amount: € 1,000
  • Interest rate of 10%
  • Term 5 months

Installment loan, installment loan or repayment loan

The loan will be repaid in constant installments. The monthly costs therefore always result from the interest, which is calculated on the remaining amount of the loan, and the credit rate. Since the credit rate remains the same, the monthly costs change accordingly. The costs are therefore lower every month.

annuity

With an annuity loan, the monthly sum of interest and installments, which is called annuity, is always the same. Except for the last payment, the costs are always the same and remain constant. This offers a good basis for calculation and is therefore often offered by banks for personal loans.

Residual debt insurance – protection of a small loan

Residual debt insurance - protection of a small loan

By taking out a small loan, consumers enter into a long-term financial liability. You must meet this by paying the agreed monthly rate on time.

Sometimes consumers are unable to pay their rate on time. This is conceivable, for example, if:

  • the borrower is ill for more than 6 weeks
  • becomes permanently unable to work
  • becomes unemployed

In all three cases, income drops. This often means that the consumer cannot repay his installment or has to release existing reserves, such as life insurance.
By taking out residual debt insurance, you have the option of securing a small loan in the event of illness, incapacity for work, unemployment or death. This insurance is therefore suitable for both the borrower and his relatives.

The scope of benefits with a residual debt insurance

In the event of an insured risk, a policyholder no longer has to meet his financial obligations from the small loan. The installment is paid by the insurance company. However, it should be noted that the scope of insurance coverage may be limited when the costs are covered. For example, it is common for most insurance companies to:

  • perform a service only after 3 months
  • limit the benefit period, for example, to a maximum of 12 months
  • severely limit insurance coverage if you have a medical condition
  • do not provide for unemployment benefits in the case of a temporary employment contract

Due to the many restrictions, residual debt insurance is only suitable to a limited extent to cover the risks of unemployment, incapacity to work or a long-term illness. The risk of the borrower’s death may be different. The reason for this lies in the fact that the insurance company usually pays for the entire remaining debt if there is no previous illness.

The cost of residual debt insurance is very high

In most cases, taking out a small loan is not linked to residual debt insurance. Therefore, no one is obliged to have such insurance. Many banks recommend taking out this insurance because they can generate additional income by selling this product.
The costs for a residual debt insurance are very high with limited benefits. Therefore, everyone should judge for themselves whether they really need such insurance or can cover a small loan with other measures such as life insurance.

Overview of credit protection

Overview of credit protection

By taking out a loan, a consumer enters into a long-term payment obligation. For this reason, in addition to a high credit rating, many banks want additional collateral to protect themselves from default. Examples of such collateral include:

  • the residual debt insurance
  • Life insurance
  • the guarantee
  • the mortgage or the mortgage
  • the lien

In addition to the banks, many consumers want to protect themselves against default. Residual debt insurance, occupational disability insurance, life insurance and life insurance are suitable for this.

A residual debt insurance creates additional costs

The simplest form of credit protection is the conclusion of a so-called residual debt insurance. This insurance is a special insurance that is directly linked to the credit contract and, if the necessary conditions are met, makes a payment if the borrower:

  • becomes unemployed
  • becomes unable to work
  • is sick for a long time
  • dies

In all of the above cases, insurance takes effect and provides extensive protection for the policyholder or his or her surviving dependents.
Comprehensive insurance coverage is a major advantage of residual debt insurance. However, it is disadvantageous to mention that the insurance costs are usually very high. For this reason, alternative forms of protection can be useful.

Private insurance as an alternative to residual debt insurance

Numerous borrowers have secured themselves or their relatives in the event of disability and death through private disability insurance, life insurance or life insurance. For this reason, additional protection is not absolutely necessary for credit protection. For example, it is possible that:

  • receives a disability pension in the event of disability and can use this pension to pay the monthly installment
  • the survivors can settle the remaining debt for a loan by paying for life insurance or life insurance

If an occupational disability insurance, life insurance or risk life insurance already exists, this form of insurance does not incur any additional costs for the borrower. This is a major advantage. It is disadvantageous to mention, however, that these insurance policies do not cover the risks of unemployment and long-term illness.

Insurance does not protect in the event that the policyholder is unwilling to pay

In principle, an insurance company only provides benefits if there is an insured risk and the policyholder can no longer practice his profession, for example. In all other cases, benefits from the insurance company are excluded. This means, for example, that an insurance company will not pay if:

  • the borrower goes bankrupt
  • can no longer fully meet his payment obligations due to a lower income
  • no longer wants to meet his payment obligations

As can be seen from the examples given here, even after taking out insurance for the bank, there is a risk that the borrower will no longer receive the borrowed money in full. For this reason, some banks require additional security from borrowers, such as a surety with a comparatively low creditworthiness of the applicant, a mortgage or land charge for a home loan or a vehicle letter for vehicle financing.
With this additional collateral, a credit institution can reduce the risk of default. For this reason, the loan conditions for many loans that are secured by additional collateral are particularly favorable.

The framework credit – cost-effective alternative to the overdraft facility

The framework credit - cost-effective alternative to the overdraft facility

Most consumers use a small loan if they need capital over a longer period and want to repay the loan taken out over a longer period. Consumers usually use the so-called overdraft facility to temporarily bridge financial bottlenecks. You can claim this at any time and repay it flexibly.
The high flexibility is a major advantage of the overdraft facility. A disadvantage, however, is that the loan interest rates on this loan are very high. For this reason, most experts advise against overdraft facilities and recommend taking out a credit line.

The credit line – a short explanation

A credit line is a special loan. Basically, this loan corresponds to the overdraft facility, since:

  • a bank grants a certain credit line to a borrower
  • can draw a loan up to the amount of the credit line
  • the use of the loan is not tied
  • the loan can be repaid flexibly
  • Usually costs arise only when the loan is drawn
  • the interest rate for the loan can be adjusted to the current interest rate development

Despite the many similarities, there are some differences between a credit line and a credit line. The main difference is that, unlike a credit facility, a credit line is not linked to a checking account. You can therefore apply for a credit line from any bank. There is therefore competition between the various providers. For this reason, the interest rate on a credit line is usually lower than that on an overdraft facility.

An overview of the advantages and disadvantages

A framework loan has various advantages and disadvantages in direct comparison to small and overdraft facilities. These are summarized here again:

  1. The interest rate is lower than for the overdraft facility and higher than for the small loan.
  2. The repayment options are more flexible than with small loans and can be compared with the conditions of overdraft facilities.
  3. Like the overdraft facility, it can be used as required, however, the transfer to a reference account can lead to a delay of 1 to 2 days.
  4. Like the overdraft facility, it only incurs costs when it is drawn on, since this loan generally does not charge any additional fees for the provision or account management.
  5. Like a small loan, it can be applied for from any bank. This enables savings to be made by comparing providers.

Due to the advantages and disadvantages listed here, it is advisable to use a credit line if a consumer needs additional capital at short notice and wants to repay it flexibly.

Beware of the debt trap: credit

Beware of the debt trap: credit

It is often the last resort to take out a small loan. If you are in financial difficulties, it seems like a good alternative for many to continue to incur debts. A loan is basically nothing else, the bank is owed money when it is borrowed. Therefore, you should think carefully before closing and be really sure that you can also pay the monthly installments.

Reasons for debt can quickly arise:

  • Sudden unemployment
  • illness
  • Arrears and invoices
  • Bad investment

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