Loan in Germany: Understanding the legal basics

What is a loan agreement according to German law?

A loan contract is legally anchored in § 488 of the German Civil Code and refers to a loan agreement 💬Darlehensvertrag between the borrower and the lender. The basis of the contract is the transfer of a subject matter of the loan 💬Leistungsgegenstand. In the case of a loan contract, the subject is the transfer of money.

The key feature that distinguishes a loan agreement from other types of contracts is that it involves a transfer of ownership, not just possession. When the money is paid out, it becomes the property of the borrower, who may dispose of it freely unless the parties have agreed on specific restrictions on its use.

Once the funds have been transferred, the borrower is generally free to use the money as they see fit. A loan agreement is fulfilled when the borrower repays the full amount owed, i.e. the sum originally received.

In a loan agreement, the lender is often a credit institution, e.g. for student loans. However, personal loans 💬Privatdarlehen from family members or friends are also common. These can offer advantages—such as no strict creditworthiness requirements—but they also carry significant risks.

Credit vs. loan

The terms credit 💬Kredit and loan 💬Darlehen are often used interchangeably in everyday language. While this isn’t entirely wrong, there is a subtle but important distinction: Credit is the broader term for any form of borrowing or external financing, whereas a loan is a specific type of credit.

Whether a financing arrangement is classified as a loan typically depends on duration and amount. In practice, a credit becomes a loan when the term is around four years or longer, although the threshold for the amount is less strictly defined.

Generally, the word credit is used for smaller sums and for financing everyday purchases that do not involve very high costs compared to real estate, for example. Buying a car, for instance, is usually financed through credit, not a loan.

Contents and form of a loan agreement

When entering into a loan agreement, it should always be put in writing. This provides reliable evidence in case of a dispute. For non-private loan agreements, the written form is legally required and must be personally signed. For private loans, a written agreement is strongly recommended, as oral arrangements offer no protection if disagreements arise.

A well-drafted loan agreement clearly sets out the essential terms, including:

• the total amount being borrowed
• the agreed duration of the contract
• how and when repayments will be made
• the applicable debit interest rate
• the number, size and timing of instalments
• what happens if repayments are late or missed
• any notice periods that apply
• conditions for cancellation or withdrawal

📌 Borrowers may withdraw from a concluded credit or loan agreement within 14 days, without observing a notice period. In return, the lender may charge early repayment compensation 💬Vorfälligkeitsentschädigung.

📌 For interest-free personal loans, keep in mind that gift tax 💬Schenkungsteuer may be payable. It’s wise to check applicable tax allowances and exemptions beforehand.

Maximum loan amount

Before granting credit or a loan, lenders assess a borrower’s creditworthiness to determine how much they can safely lend. Depending on the institution, the maximum loan amount is calculated in one of three ways:

Based on annual net income

The lender either:

• adds together the net incomes from the past three years, or
• uses the lowest annual net income from that period.

This figure becomes the calculation basis and is then multiplied—typically by six to nine—to determine the maximum loan amount

Based on monthly net income

Here, the lender considers the borrower’s monthly net income, including regular payments such as child benefits or rental income. The amount is then multiplied by 110 to derive the upper borrowing limit.

Based on affordable monthly instalments

In this method, the lender compares the expected monthly loan instalments to the borrower’s total monthly income. After deducting living expenses and applying a safety margin, the bank determines the maximum instalment the borrower can realistically afford — and from this, the maximum loan amount is calculated.

Acknowledgement of debt, guarantee & security

For larger loan amounts, lenders often require an acknowledgement of debt 💬Schuldanerkenntnis when the agreement is signed. This is a notarised declaration confirming that the borrower owes a specific debt to the lender.

Some institutions go further and request a guarantee 💬Bürgschaft instead. If the borrower breaches the contract and the guarantee is valid, the lender may pursue the guarantor’s private assets, including forcing the sale of property if necessary. A guarantee may be deemed invalid if, for example, it was signed as a favour by a spouse or partner who does not have the financial means to cover it.

Another common form of security is the transfer of ownership by way of security 💬Sicherungsübereignung. Here, valuable items—such as a car—are transferred to the lender as security. If the borrower fails to repay, the lender can demand that the asset be handed over.

Unsecured loans

A loan granted without standard collateral is known as an unsecured loan 💬Blankodarlehen. Banks typically issue these only for relatively small amounts—and never without first checking the borrower’s creditworthiness 💬Bonität.

Loan-in-kind contract

The distinction between a loan agreement  and a loan-in-kind contract 💬Sachdarlehensvertrag lies in the subject matter of the loan. Both involve handing over a fungible object, but the type of object differs.

In a loan agreement, the subject matter of the loan is usually money, securities, or other financial assets. In a loan-in-kind contract, the basis is the transfer of fungible goods—items that are interchangeable because they are identical in use, such as when you borrow a few eggs from a neighbour.

Sample of a German loan agreement

The following form for a simple loan agreement is a non-binding sample (in German) and may need to be adapted for your specific case. 📌 The sample may not be suitable for the desired purpose in various cases and does not replace legal advice.