Loan requirements for borrowers and lenders


Loan agreements fall under German law under the obligations. These offer the parties a relatively large scope in the design. However individual the details may be, there are requirements that the borrower, the lender and the Loan agreement must meet. This serves to protect all involved.

All facts about the guide “Loan Requirements” at a glance:

  • The borrower needs
    • prove his Loanworthiness
    • have the appropriate age,
    • have a German residence,
    • have a regular income
    • To provide collateral
  • The lender must comply with the Usury Law, the terms and the right of withdrawal.
  • The Loan agreement must include the loan amount and the repayment terms.

1. What the borrower has to do

1. What the borrower has to do

If you want to borrow money, you should also be able to pay back in the near or distant future. Not all, but most of the potential debtors will bring the will. But even if the will may move mountains, the reduction of debt, the world looks different from experience. Therefore, the business lenders have considered indicators that can be used to identify the risk of insolvency in advance. The borrower has different requirements depending on the lender. Generally, however, a few clues can be found.

An exclusion criterion is the residence of the borrower. It is imperative to have permanent residence in the Federal Republic of Germany in order to obtain a loan here. Income is an important indicator for both self-employed and salaried employees. Without regular income, repaying a loan is almost impossible. Therefore, income can be considered a prerequisite to get a loan approved.

The circumstances of how this income is earned also plays an important role. Is the employed person still in the probationary period or even in training? All these factors are more or less weighted depending on the lender and influence the Loan decision.

Age, unfair as it may seem to some, is a crucial factor. Although the Loanworthiness per se is less, but the amount of the loan is tightened. The fewer years of employment the lower the repayable amount. In addition, the chances of illness or, in the worst case, death are becoming more and more likely. Here it may be possible that lending is necessarily linked to the conclusion of insurance. For more information read the guide “Debt-free heritage through Loan life insurance”.

The Loan rating is not questioned by all lenders. Information about it gives the private Loan. Normally, during the loan application you are asked to enclose a private Loan self-report. You will find out how this works in the guidebook “The private Loan Self-Examination Pattern: How to Find out Your Status!”.

Especially with loans, many banks require collateral. Of course, these collateral can rarely set off the entire Loan line, but at least compensate for part of it in an emergency. These collateral can be in the form of tangible assets, such as the well-known mortgages on houses, leaving a risk life insurance or even quite classic the use of a guarantor. Incidentally, the fact that many borrowers lend their pensions to take on high loans led to the idea of ‚Äč‚Äčintroducing the Riester pension. This pension insurance is impracticable and thus guarantees a return in old age.

You can find out more about guaranties in the guideline “Loan with guarantors: a popular but risky financing”.

Requirements for a borrower

It is imperative that the borrower provide true information throughout the application process. The lender is required to verify the information. If the information is incorrect, the application procedure may be terminated immediately.

There are numerous indicators that influence the decision of the lenders. Each lender places value on other indicators. In general, however, there must be the prospect that the borrower may eventually realize capital gains in order to repay the loan.

2. The lender in duty

2. The lender in duty

In Germany, only those financial service providers authorized to do business are authorized by BaFin and the European Central Bank. BaFin is the Federal Financial Supervisory Authority. Once the lender has gone through the authorization process of these controlling bodies, they can start the lending business.

First, the lender is required, in his own interest, to take a close look at the debtor’s Loanworthiness. In the case of negligent lending, the financial institution is at risk in the event of damage. In general, it is assumed that financial institutions whose daily business is dealing with numbers can better estimate their solvency on the basis of information provided by the borrower. Their experience should protect the borrower from unreasonable decisions.

Especially in the Loan agreement, the lender is obliged to make available the loan amount for the specified period. With the transfer of money, the borrower is obliged to comply with his agreements.

Furthermore, the lender is encouraged not to impose excessive demands on the borrower – even if this would not ruin the borrower. This is specified in the so-called usury prohibition §138 paragraph 2 in the Civil Code. Violation can lead to the invalidity of the contract.

Requirements for a lender

In recent years, some borrowers have been able to borrow from loan agreements, as the lenders have not included clear cancellation policy in the contracts. This is absolutely necessary and can lead in case of uncertainty to terminate the contract.

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3. The contract: This is to be considered!

First, all parties involved in the right must be mentioned in this contract. These are, on the one hand, lenders and borrowers, and on the other, they can also be guarantors. The consent of all parties is valid by the signature. In the contract, the loan amount and all agreements on repayment terms must be fixed in writing. This also includes dealing with special cases or special conditions.

Also to clarify is the possibility of early loan cancellations. This passage is in the interest of both parties. Life is difficult to plan, which is why, especially with long-term loan agreements, all eventualities must be taken into account. Further information on this topic can be found in the guidebook “Cancel a Loan: Things to Remember!”.

Graphic representing the requirements for the loan agreement.

Requirements for a loan agreement

What a loan agreement has to look like in order to ensure legal validity can be found in the guideline “Loan agreement by means of samples, templates & forms for download”. Of course, the details of the contract are freely designable. Here it is only about observing the key points.

4. The conclusion: reality paves the way for visions

Free design options within the conditions

 The question of the reason for the loan request is an additional indicator of lending, depending on the amount of the loan. In the case of start-ups, this is even the basis for the installment payments. Self-employed persons in particular are taking on an increased risk, since the future plans are usually accompanied by visions. The fantasies of borrowers and bank advisers can only be lived out in the context of the pinned reality.

Therefore, it is all the more important that both sides approach a loan agreement with a healthy dose of enthusiasm for innovative ideas, but also with the necessary respect for reality. Only if a repayment of the loan can be guaranteed, both sides can profit from it.

Repayment problems are annoying for a lender, but with a borrower – whether self-employed or employed – one’s own existence can be destroyed. In the most tragic case, the fate of a whole family and / or a guarantor also depends on this loan. Therefore, to protect the borrower, it is particularly important to closely examine the Loanworthiness and not to make unrealistic compromises. For supposed allegiance can have far-reaching consequences.

Thus, the preconditions for a loan can be considered as the framework within which the parties can move in a relaxed manner without fear of excessive risk.

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