Loans in Germany: The legal stuff you should know

How is a loan defined in Germany? What does a loan contract look like? What’s the difference between a loan contract and a loan-in-kind contract?


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What is a loan agreement according to German law?

A loan contract is legally anchored in § 488 of the German Civil Code (BGB) and refers to a debtor contract between the borrower and the lender. The basis of the contract is the transfer of a Leistungsgegenstand, which translates to “performance object” or “object of performance” but can also mean “services rendered”. In the case of a loan contract, the performance is the transfer of money (the object).

Leistungsgegenstand is a term you’ll come across quite a bit if dealing with contracts.

The loan agreement is different from other loan agreements. This is because there is not only a transfer of possession but also a transfer of ownership. In other words, the money is transferred into the possession and ownership of the borrower.

After the handing over of the money, the borrower is free to dispose of the money – unless there is an agreement on how the money can be used. A loan agreement is fulfilled when the borrower repays in full the debt (i.e., the amount of money handed over).

The borrower may lawfully use the amount of money handed over and does not have to return the same banknotes at the end of the loan period, but equivalent banknotes and/or coins according to the generic debt.

In the case of a loan agreement, a credit institution is often the lender (for example, student loans), but personal loans from people close to you are also possible. Borrowing money from family or friends has its advantages but, at the same time, some big disadvantages. The biggest advantage of a personal loan is that there are no strict criteria regarding creditworthiness. But, in the case of late repayment, it can strain close relationships. With a personal loan, the contract terms are through a private agreement, which can have unintended consequences.


What’s the difference between Kredit (credit) & Darlehen (loan)

The terms Kredit (credit) and Darlehen (loan) are used interchangeably in everyday language. In principle, this is not wrong, but there is a small but subtle difference: Credit is the generic term for borrowing money or external financing – while a loan is a type of credit.

Classifying something as a loan depends on the term and the amount. “credit” becomes a “loan” when its term is four years and above. But, the crossover threshold for the amount is more fluid.

But, generally, the term “credit” is used for lending smaller amounts of money, i.e. everyday purchases that are less costly than, for instance, real estate. For example, financing for purchasing a car is usually via credit, not a loan.


What should I consider in a loan agreement? What should it include?

When entering into a loan agreement, it should be in writing so that you have proof to rely on if there’s a dispute. The non-private loan agreement always needs to be in writing anyway (a formal requirement) and must be personally signed. In the case of private loan agreements, you should also use the written form because an oral loan agreement is no safeguard against disagreements.

When drawing up the contract, take care to adapt it to the individual circumstances. A best practice loan agreement includes:

  • total loan amount,
  • contract term (loan duration),
  • type of repayment,
  • debit interest rate,
  • the amount, number and frequency of repayments,
  • consequences in the event of default/delay of repayments
  • notice periods, and
  • cancellation/withdrawal conditions*.

Since the EU Directive on Consumer Credit Agreements came into force in 2010, borrowers are now allowed to withdraw from a concluded credit or loan agreement at any time within 14 days without having to adhere to specific notice periods. As a trade-off, however, the lender can also demand a Vorfälligkeitsentscheidung (early repayment decision) – aka compensation.

For interest-free personal loans, bear in mind that gift tax (Schenkungssteuer) may be payable. It’s best to find out in advance about gift tax and its exemptions.

The Basics of Credits & Loans

Maximum loan amount

When granting credit and loans, the lender checks whether a person has the necessary creditworthiness before concluding the contract. Depending on the creditworthiness, the maximum loan amount is also determined. There are three different methods for this:

  • Determination of the maximum loan amount using annual net income: Either the net incomes of the last three years are added together or the lowest net annual income of the last three years is considered. This sum serves the bank as the basis for calculation. Depending on the institution, this is multiplied by six to nine to determine the maximum possible loan amount.
  • Determination of the maximum loan amount via monthly net income: This method looks at your monthly net income and multiplies it by 110. Income includes regular payments such as child benefits or rental income from landlord activities.
  • Determining the maximum possible monthly instalment: Here, the bank compares the monthly burden of the loan instalments to the total monthly income and checks which sum is eligible for repayment of the loan after deductible and security surcharge.


Acknowledgement of debt, guarantees & transfer of ownership by way of security

In the case of large sums, credit institutions reserve the right to demand an acknowledgement of debt from the borrower when the contract is concluded. This declares that the borrower has debts to pay to the lender and must be notarised.

For some banks, the acknowledgement of debt is not enough and instead, they demand a guarantee from the borrower. However, if there is a breach of contract and the guarantee is not valid, the lender can seize the guarantor’s private assets and may even force the sale of property to service the loan. A guarantee is invalid if, for example, it is signed by a partner or spouse who has taken on the guarantee as a favour, without having the resources to do so.

In addition to the acknowledgement of debt and the guarantee, the transfer of ownership is another way to secure a loan. In this case, valuable assets such as a car are transferred to the lender. If the borrower does not repay the loan, the lender can demand that the asset be seized.

What is an unsecured loan (Blankodarlehen)?

A loan without the usual loan collateral is an unsecured loan (or Blankodarlehen in Germany). Banks often grant unsecured loans for small amounts of money, but never without first checking creditworthiness.


What is a loan-in-kind contract? How is a different from a regular loan?

The difference between a loan contract (Darlehensvertrag) and a loan-in-kind contract (Sachdarlehensvertrag) is the Leistungsgegenstand. Both contracts are based on the handover of a fungible object, but the difference is the object of performance.
If you recall from the start of the article, this term means the “object of performance” and is the handing over of money, securities or other fungible things.

The basis of the loan-in-kind contract is the handing over of a fungible object. Fungible goods are items that are interchangeable because they are identical to each other for practical purposes. A fungible thing is mostly an object of consumption, for example when you ask your neighbour for a few eggs.


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 supplemented for your specific case. The sample may not be suitable for the desired purpose in various cases and does not replace legal advice. Simply fill in the blanks.

Download a sample loan agreement as a PDF

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