Credit without security – serious model or credit rip-off?

The application for a loan is made regularly to a bank or savings bank. Internet offers are increasingly being used, with banks and financial service providers present as well as loan offers as well as specialized portals that offer loans from private investors. Different requirements are placed on the borrower’s creditworthiness. The demand for collateral is also handled very differently.

Requirements for a credit approval

Requirements for a credit approval

The credit institution generally decides on the loan application made to a bank or savings bank after a comprehensive credit check. On the one hand, this consists of checking the income situation on the basis of the wages or salary slips of the last (usually three to six) months. For employees and pensioners, a regular monthly net income of 1,200 to 1,500 USD is usually required after deducting all regular charges such as loan installments or rent.

On the other hand, an inquiry is made to Credit Bureau or another credit bureau. People who can prove the necessary current income and for whom the credit report is positive usually do not need any additional security for installment loans. If the monthly standard income of loan applicants (e.g. low earners, students or unemployed) does not reach the required minimum level or if the credit report contains negative features such as bank loans or checking accounts, the loan application is either rejected directly or the demand for collateral is raised.

Such security can consist in the fact that a guarantor or co-debtor who himself fulfills the bank’s creditworthiness requirements enters the loan contract and assumes the obligations from this contract jointly and severally. If available, claims from existing life or pension insurance policies can also be used to secure loans. Furthermore, encumbering real estate with real estate liens such as mortgages or land charges is a suitable security measure.

However, it is becoming increasingly clear that commercial banks and savings banks base their decision on lending solely on the rating of Credit Bureau (” scoring “) or on the rating of another credit agency, without examining the question of the existence of collateral.

The importance of collateral in lending

The importance of collateral in lending

This often means that installment loans – which are typical consumer loans – are approved without further security if the creditworthiness check is positive. However, if the creditworthiness check of the bank or savings bank turns out to be negative, the presence of collateral often does not lead to the conclusion of a loan contract.

The risk of default when making use of guarantors or co-borrowers also plays a role, as does the risk of exploitation when pledging movable property. Therefore, collateral is now mostly only of importance for certain forms of credit.

Securing such loans, which are taken out for the purchase of real estate, is indispensable. Here, the property, the acquisition of which is financed by the loan, is charged with a mortgage or mortgage in favor of the lender to secure the loan.

In the case of a car loan, the vehicle is transferred to the lender to secure the loan, which is reflected in the fact that the vehicle letter is deposited with the financing bank.

Apart from these two types of credit, the question of collateral is usually only asked in the case of high credit volumes in the commercial sector. Transfer of ownership by entire factories and machinery continues to play an important role here.

Credit despite lack of collateral

Credit despite lack of collateral

From the point of view of the prospective private loan, the question arises as to whether and under what conditions a loan can also be obtained if neither the creditworthiness requirements of a bank or savings bank can be met, nor can customary bank collateral be provided.

In such cases, the potential borrower has little opportunity to get a loan from a traditional commercial bank or savings bank. In this situation, he encounters – mostly on the Internet – offers from direct banks or specialized financial intermediaries who also want to make loans possible in such cases.

Often these are loans that are described as “ Credit Bureau-free ” and that are provided by lenders from abroad, mostly from Switzerland. It should be noted that even “Credit Bureau-free” loans and ” loans from Switzerland ” are often only granted after certain creditworthiness requirements have been met. Even if an inquiry is not made to Credit Bureau, it may be the case that a certain minimum income is demanded or that a long-standing, unsigned employment relationship must be proven.

Such loans depend on the individual risk assessment of the lender. Often, however, only loans in small amounts – usually no more than 5,000 USD – are approved. The credit limit is often significantly lower. In addition, banks or financial investors mostly outweigh the increased default risk due to lack of creditworthiness and lack of collateral through loan interest rates that are slightly above the market interest rates for installment loans. In addition, there are often restrictions on the term of the loan and the amount of monthly repayments.

Loans despite the lack of collateral are therefore only suitable for a group of people who do not have access to the general credit market due to a lack of creditworthiness and therefore have to accept an increased interest rate due to risk. Such a loan is usually used to cover urgent short-term money needs. An alternative could be to take out an unsecured loan from private investors.

There are now several online brokerage portals that combine supply and demand. The investor decides for himself what requirements he places on the creditworthiness of the inquirer and whether he demands the provision of collateral. Here it is sometimes possible to get a loan without collateral. However, here too, the loan amounts are usually very limited. In addition, private investors generally also ask for a higher interest rate due to risk.

Checking loan offers

Checking loan offers

Anyone who does not receive a loan from conventional commercial banks or savings banks due to a lack of creditworthiness and cannot fall back on customary collateral must enter a largely unregulated segment of the banking industry. Accordingly, the offers for unsecured loans vary considerably.

This starts with the amount of the loan amount available. While most loan offers contain low upper limits of mostly 3,000 to 5,000 USD, there are also lenders who provide a significantly higher credit value. Occasionally, upper limits can be found on the Internet, which are 30,000 or even 50,000 USD.

Some providers only grant so-called bridging loans with very short terms of often only one to three years. The monthly interest and repayment rates are correspondingly high. However, there are also terms that correspond to those of conventional installment loans. These usually last up to 84 months. The required interest rates start at the upper limit of normal market conditions and sometimes extend far beyond.

Because of the extraordinary range of interest rates required, a comprehensive comparison can be made and offered via the relevant platforms on the Internet. The other conditions should also be checked carefully. This applies particularly to the incidental costs. Often, transaction costs or agency fees are charged that are higher than standard credit contracts.

In addition, it is often required to take out residual debt insurance, which often makes the loan considerably more expensive. In addition, when comparing conditions, it should be considered whether a complete or partial early repayment of the loan is possible without the lender charging early repayment.

Anyone who needs a loan without being able to provide collateral and otherwise does not meet the creditworthiness requirements of banks or savings banks is often confronted with offers from the gray capital market. In addition to reputable direct banks and credit intermediaries, there are also market participants for whom the integrity of their business practices is in doubt. If a provider or broker requests advance payment or claims a performance-independent commission, there are reasonable doubts as to its seriousness. This also applies if, in addition to the loan application, an “advisory contract” subject to reimbursement is also to be signed. In such cases, it is often worthwhile to research this provider on the Internet. Often there is information and testimonials from people who were damaged or cheated during a business contact.

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