Professional lending
When you take out credit, someone provides you with money, which you pay back at a later point in time.
The term credit comes from the Latin words credere, "faith," and creditum, "something entrusted in good faith". You can refer to an online banking dictionary for a precise definition:
Credit
"It is a sum of money that is made available by a person, business or bank for a specific period of time. The beneficiary must pay a form of remuneration called interest in return for having this sum of money made available to it. It generally also has to give the bank a security for the sum of money borrowed. This is called "collateral" (source: SVRB Banking Glossary). Consumer credit typically dispenses with this collateral and involves higher rates of interest accordingly.
Why take out credit?
When you take out credit, you are embarking on a long-term commitment. In the case of consumer credit, this is done on the belief that your household budget will not fall during the term of the credit. You pay a surcharge of up to 15% interest per annum. Therefore, think carefully about whether you want to take on the risk and then take this step.
In certain situations it may be useful to avail of credit. This is particularly true in three cases:
- If you are planning a large purchase, which you cannot fund yourself in one go from your pocket. The most important example is buying a house.
- If you wish to complete initial or further training.
- If, for some unforeseen reason, you experience financial difficulties and are dependent on borrowed money to bridge the shortfall.
However, the cheapest solution is if your family or one of your friends gives you a helping hand. There are two situations in which we would definitely discourage you from taking out consumer credit:
- If your budget leaves you with no further scope for unforeseen events after taking out the credit.
- If there are already signs that your budget will deteriorate during the term of the credit, if you have a baby, or if you retire.
Security on credit
Different forms of security or collateral are requested, depending on the type of credit. One option is to deposit an item of collateral with the bank or finance company, such as a life insurance policy, securities (such as shares and bonds), jewellery, etc. If you fail to meet your payment commitments arising from the credit, the bank can sell off the collateral.
Under certain circumstances, the credit institute may ask a financially sound person to act as a guarantor. In the event of an emergency, this person will declare to repay your credit. Many persons arrange and combine various liabilities whereby the borrowers promise the lender to repay the debt in full. The bank pays the credit out once and in return receives two (or more) undertakings to repay it. However, it can collect payment for the credit only once.
If these avenues fail or no securities have been agreed upon, an unpleasant variant will come into the equation. The lender will pursue you through a debt collection agency and may take you to court to get its money back.
If problems arise, contact the debt-counselling service
Contact a debt-counselling service if you are having problems repaying consumer credit. They will examine whether the credit is lawful. If possible, the service will attempt to negotiate an easing of your payment burden.
Further Information
ZEK (Central Credit Information Agency)
IKO (Information Agency for Consumer Credit)
Association of Debt Reorganisation Berne
