The Basics: Loans
The Consumer Loans Act (VKrG – Verbraucherkreditgesetz) is basically applicable to loans for consumers as well as for example overdraft facilities on bank accounts as well as options to pay in instalments provided by companies.
Consumer credit agreements, that are secured against a mortgage, and loans that are intended for the acquisition of property, are in principle subject to the provisions of the Mortgage and Immovable Property Credit Act (HiKrG – Hypothekar- und Immobilienkreditgesetz).
These legal acts can be found (in German) on the website of the Legal Information System of the Republic of Austria (RIS).
Prior to the conclusion of the contract
Prior to taking out a loan, a budget plan should be drawn up, on the basis of which regular income can be compared against ongoing household expenses. A good instrument for informing yourself, as well as self-control, is keeping a set of household accounts.
Companies are obliged to provide you with important information prior to the conclusion of the contract, which for example inform you about your rights, about the loan, the costs associated with the loan and also about the lender of the loan. This information is also provided to allow you to compare different loan products – you should use this information and the opportunity to compare several loan products from different providers, in order to be able to select the best loan for you. Contact independent bodies that regularly compare loan conditions offered. The annual percentage rate (APR) expresses the actual annual costs for the borrower while taking into consideration all costs relating to the loan (both interest costs and ancillary costs). The figure allows you to be able to compare loans with one another, that are for different amounts or have different terms.
A repayment plan is a draft of when which payments are required to be paid. In the case of a loan agreement with a fixed term, the lender is required to provide your with a breakdown in the form of a repayment plan free of charge upon your request at any time during the entire term of the loan agreement. From the repayment plan it must be clear which payments are to be made at what intervals, as well as which conditions apply for these payments. In the case of a credit agreement, with a variable interest rate, or where the additional costs may be subject to change, the repayment plan must clearly and concisely mention that the information contained in the repayment plan are only valid until the borrowing rate next changes or for the period that the additional costs in accordance with the credit agreement apply. (Article 10 of the Consumer Loans Act (VKrG – Verbraucherkreditgesetz))
Statement of account
The lender shall be required to supply you with a statement of account by the end of March of the following year, which as a minimum contains the total amount of payments you have made by the cut-off point of 31 December of the preceding year, as well as the total of charges and the remaining balance. Please ensure that you store this documentation safely, so that you are always able to have an overview about your loan.
In the event that you have difficulties making payments, it is advisable to contact a debt counselling service (Schuldnerberatung) as soon as possible.
Caution: The Financial Market Authority does not monitoring compliance with the obligations listed in the Consumer Loans Act and the Mortgage and Immovable Property Credit Act. This task is not one of the tasks conferred upon the Financial Market Authority by law. Please contact the points of contact listed on our website if you require further advice or support!
- Check whether the purchase that is to be financed by a loan is actually necessary at the current point in time.
- Ascertain how high the total costs of the planned purchase are as well as the means you have at your disposal, and therefore what loan amount is necessary. The total costs is the total of all payments that you are required to pay to the bank on the basis of the credit agreement. The amount of the total costs is only conclusive when comparing different loan others, if both offers are for the same amount of the loan and for an identical term.
- Before signing a loan agreement, make sure that you have taken enough time to think the matter over. In any case, you should only sign the agreement if you have actually understood it. Your signature should never be put on blank forms, but should only be added to fully filled out and read contracts.
- Compare different available offers!
- As a consumer you have the right to cancel a loan agreement within fourteen days without giving reasons for doing so. The timeframe for exercising your right to cancel the agreement starts on the day that the loan agreement was concluded. However, if the terms of Article 9 VKrG and the terms of the contract were only communicated to you at a later date, this grace period only starts to run from that point in time. For credit agreements that are secured against a mortgage intended for the purpose of acquiring property, there is a basic period of 2 days for cancelling the agreement (Article 13 HiKrG).
- Banks are obliged under law to make a complete draft of the intended loan agreement including the applicable terms of the loan available to you upon request (Article 6 VKrG). This draft must also contain the amount of the total costs and the effective annual percentage rate (APR). On the basis of these figure, you can (with some restrictions) determine which loan is cheaper for you. You should exercise caution about advertisements that promise a quick and unproblematic approval of a loan (e.g. without or only with an inadequate legally prescribed solvency check; see Article 7 VKrG).
- Inform yourself about the legal provisions set out in the Consumer Loans Act (VKrG). Pursuant to Article 3 VKrG all contractual agreements, in which there is a deviation from the provisions of the VKrG to the detriment of the consumer, are rendered ineffective.
- You should always check whether your regular income is able to bear the additional costs which may arise from a loan. The monthly instalments must still permit a sufficiently large financial buffer to address unforeseen expenditures. Any impending changes in financial circumstances should also be taken into account. Remember that there are ancillary costs associated with every loan (the fee for setting up the loan agreement, the processing fee, the account management fee, the cost of insurance against the outstanding balance of the loan; and in the case of mortgage loans there are also property registry fees, estimates costs and notary’s fees). In the case that these ancillary costs – which is frequently the case in practice – are intended to be deducted from the loan amount that is paid out to you, then you will require an accordingly higher credit amount. The ancillary costs are listed directly in the loan agreement or in the General Terms and Conditions (GTC) of the credit institution.
- The higher the instalment is set for a set financing requirement, the short the term of the loan is and accordingly the lower the financing costs are. Remember of course that the applicable interest rate for a loan is often variable from the outset, or at the very least following an initial period with a fixed rate, and that the loan instalment may increase considerably if the interest rate increases. Finally also consider the fact that in the event that you income changes (for example as a result of illness or unemployment) that the loans instalments nevertheless still must be paid.
- Take particular care over clauses relating to wages or salary transfers! In this case you should ensure that you read the small print in the contractual terms and conditions in advance.
- By agreeing on a fixed interest rate you are able to protect yourself against interest rate risk, which as a rule is only offered by banks as a rule for part of the term of the loan (e.g. for the first year, or the first three years). Agreement upon a fixed interest rate (for an initial period) is particularly likely to occur when the loan was taken out during a period with low interest.
- Furthermore, in the event of agreeing of an initial fixed interest rate, you should find out precisely how high the subsequent variable interest rate would be based on the current interest rate. Since the fixed interest rate normally is only agreed for a small fraction of the total duration of the loan, the amount of the subsequent variable interest rate is considerably more important. In the event of a comparison with other loan offers, it is therefore important to primarily to focus on the amount of the variable rate, rather than the amount of the initial fixed interest rate. Since the entry into force of the VKrG, banks have also had to take the variable interest rate into consideration in this case (on the basis of the applicable reference interest rate as the time the loan agreement was included) in calculating the effective annual percentage rate.
- In practice in address, when taking out a loan, you must usually take out insurance to cover the remaining balance of the loan or another type of life assurance, which repays the outstanding balance of the loan in the event of the borrower dying. Since there are substantial differences in premiums in this case as since insurance for the outstanding balance of the loan incurs high additional costs, particularly the older the borrower gets, you should in any case also get comparable offers, and not immediate conclude the insurance contract offered by your bank. If you already have an existing life assurance policy with adequate cover in the event of death, you may be able to avoid having to take out an additional insurance policy and instead may be able to allow the existing insurance policy to be pledged to the bank.
- It is in any case recommendable, to ensure that all loan agreements, statements of account, warnings and bills are kept safely. This makes it easier to have a clear overview about the outstanding exposures and the loan.
- Never provide guarantees as a favour, as doing so exposes you to unnecessary risk.
- Credit intermediaries act as intermediaries between the bank and the borrowers. Consequently in the event of a loan being brokered by an intermediary there are often in addition to the defined payments also processing fees and commission fees to be paid.
Sources: Finanzportal 23.08.2010 and N24.net.de 23.08.2010