Various types of credit are offered on the financial market, from small loans for consumers to real estate loans for traders. Find out which of the many types of financing is right for you in this article! Who actually writes and advises here?
Credit Types – Overview
While the designation of some types of credit has an official character, there are other types of credit or financing that carry their name primarily for marketing reasons.
What types of credit are there?
There are different approaches to naming a credit type, for example: Differentiation by lender, by borrower, by purpose or by contract term. The distinction according to the speed of approval is often only a trick of the credit experts. The primary aim here is to encourage consumers to apply for funding.
Multiple names possible for one product Note: The classification into different types of credit means that a financing can have several names, all of which are correct. A bank loan granted to a private person is also a consumer loan. If the borrower is also a civil servant, the term official loan may also apply. Possible types of credit
Differentiation by lender
Banks and other financial institutions
Loans granted by a bank or a company with a banking license are consistently referred to as bank loans. The banking licenses are issued in Germany by the Federal Financial Supervisory Authority (Bafin). Companies without a Bafin license do not usually call their financing a bank loan.
Overdraft facilities, so-called “dispos”, are always linked to a checking account with a bank. Accordingly, this “overdraft facility” can only be offered by current account providers. If the borrower is a trader or a company, one speaks of a current account credit.
This type of loan is often referred to as a trade or commodity loan. It is granted by a supplier to a delivery recipient. This type of loan is often only granted to traders, not private individuals.
If the lender is not a company (i.e. not a bank or a supplier) but a private individual, the term “private” loan is often used.
There are now numerous providers on the credit market that bring private lenders and borrowers (private or commercial) together and at the same time take care of the settlement. With many variants of granting a loan “privately”, it is no longer absolutely necessary for this form of lending that the two contracting parties know the identity of the other. This is then only known to the intermediary company.
An employer loan (or also: employer loan or employee loan) is granted to an employee by their own employer. The borrower often receives particularly favorable conditions here, sometimes as an additional benefit from the employer.
Differentiation by borrower
Loans that individuals apply for are often referred to as consumer loans. There is usually talk of consumer credit whenever the financing is intended for the purchase of consumer goods or the payment of services for private use.
If a loan – regardless of whether consumer credit or other funding – granted to an official, you can sometimes speak of an official credit. Civil servant status is not insignificant in the case of private loans, since civil servants often receive cheaper financing than other employees because of their secure income.
The security or uncertainty of the income situation also plays a role for the self-employed ( credit for the self-employed – see following section), trainees ( credit for trainees ) and pensioners ( credit for pensioners ). These groups of people often find it difficult to obtain funding – and then only on rather unfavorable terms.
Freelancers, the self-employed and entrepreneurs, like all other borrowers, must prove their creditworthiness. However, this is not always easy for these groups of people, since it is about the income-expenditure situation, among other things. And here, freelancers, the self-employed and entrepreneurs rely on their customers paying their bills regularly and in full. If this is not the case, the applicants may only be offered poor conditions or no funding at all – despite the good order situation. For this reason, loans for traders are usually treated specially.
Differentiation according to purpose
Unspecified Loans vs. Purpose-linked loans
Car loans and real estate loans can often be obtained on more favorable terms than, for example, consumer loans. The background: The car or the property can be sold by the bank if necessary in order to pay any outstanding loan costs. The damage to the bank is therefore significantly less in the event of a loan default.
Car and real estate loans are referred to as earmarked loans. The same applies to debt rescheduling loans, which may only be used to replace existing financing with new, cheaper ones. In this case, the bank assumes that the borrower will have more money available after the debt restructuring than before. Finally, ideally, the monthly installments of the new loan are lower than those of the old one. The bank therefore assumes that the likelihood of a loan default will decrease.
Non-earmarked loans, i.e. loans where the borrower does not have to specify what he wants to do with the money, are usually significantly more expensive. If the money was spent by the borrower, the bank has no security with which it could settle outstanding loan installments in the event of a so-called loan default.
Term and loan amount
Also with regard to the term, there are no uniform regulations as to when a loan can be described as a short-term or a long-term loan, for example. However, a tripartite division is now common:
|short term loan||less than 1 year|
|medium term loan||1 to 4 years|
|long-term credit||more than 4 years|
These terms are by no means binding. Whether a type of loan is now referred to as a “short-term loan” is initially at the company’s discretion.
The following names are used to classify the credit types according to the amount of the loan.
|small loan||up to 10,000 USD|
|Medium-sized Loan / “Medium Loan”||10,000 USD to 1,000,000 USD|
|million loan||from 1,000,000 USD|
|large exposure||Loans with a volume of at least 10% of the credit institution’s eligible capital|
Especially with the types of loans in the lower segment, i.e. small and medium-sized loans, the names vary in relation to the amount of the loan. It may well be that one company classifies all financing under a loan amount of $ 10,000 as a “small loan”, while in another company financing is only considered a “small loan” if the loan amount is below EUR 5,000.
These types of credit must be insured
The legislature does not prescribe which types of credit must be covered by insurance. In practice, however, it has been established that almost all financial companies do the same. Basically, the higher the loan amount, the greater the likelihood that the financing will need to be covered by insurance.
The background: with a high loan amount, the costs that the bank remains on in the event of a loan default are particularly high. That is why the company wants to protect itself in this case – but at the expense of the borrower. So if you want to take out a comparatively expensive real estate loan, you might not be able to avoid taking out credit insurance. Otherwise the loan application will be rejected.
Conclusion: The names of the credit or financing types
The following applies to quite a few types of credit or financing in the area of consumer credit: the naming is primarily used for marketing purposes and initially says little about the conditions. A “vacation loan” is offered by various financial institutions as well as a “craft loan”, but these are usually only commercial consumer loans that are granted without any purpose.
The conditions are therefore identical to financing in which the borrower has stated “for free use”. In these cases, the bank cannot sell the object of financing (the vacation or the services of the craftsman) in the event of a loan default and thus pay the outstanding costs. There is therefore no reason for the bank to offer other conditions in the form of, for example, lower interest rates. The decision is the so-called default risk – and this is identical in the cases mentioned, at least from a statistical perspective.
“Sofortkredit” = immediate payment?
Offers such as “instant loans” suggest prompt payment. In some cases, this is actually the case, but often (not always! Keyword: existing customers), various information must also be obtained from the bank before the loan is approved. And this takes a certain amount of time, so that the “immediately” must be viewed relatively.
Does “immediately” mean a time frame of just a few hours? Or within 24 or 48 hours?
“Immediately” means in almost no case that the applicant receives the funding immediately after submitting the application. Exceptions are usually only loans that are granted at a very low loan amount and at the same time only to existing customers. Because with a low loan amount, a loan default is not as serious; the creditworthiness of existing customers is often already known.