Consumer Credit in Germany
(By Verbraucher - Zentrale Hamburg e.V.)

Consumer Credits

1. National Legislation
Since 01.01.2002, all relevant legislation concerning credit agreements is incorporated in the Germany Civil Code “Bürgerliches Gesetzbuch” (BGB). Before that date, legislation was scattered in different codes, making its use awkward. Since Germany was required to implement different EC directives (e.g. the e- commerce directive), it used the opportunity to integrate existing national legislation in the Germany Civil Code. The regulations are contained in sections 488 – 507 BGB and are based on the Directives 87/102 and 98/7.
In accordance with the Directive 87/102, Germany law regulates credit agreements whereby a creditor or trader grants or promises to grant a consumer a credit in the form of a deferred payment for more than 3 months, a loan or other similar financial accommodation.
Consumer in this respect means any natural person acting for purposes outside his trade or profession. However, persons taking out a loan/ financial accommodation in order to take up a profession are regarded as consumers in this respect, provided the amount is less than Euro 50.000. Creditor on the other hand is a natural or legal person who grants credit in the course of his trade, business or profession, or a group a such persons.

a. Loans
The regulations do not apply to loans involving amounts less than 200 Euro and any loans -provided the annual percentage rates of charges are below those prevailing on the market- granted by an employer to an employee or by the state for promoting town planning or the acquisition of immovable property.
Loan agreements have to be in writing and the consumer has to receive a copy of it. It is sufficient that offer and acceptance are given on different copies, it is not necessary that the parties sign the same copy. Offers produced by automatic devices do not have to be signed by the creditor. Unless the credit is granted as an overdraft, the copy received by the consumer must state:
- the net amount of credit (actual amount of credit paid to the consumer)
- the total amount of instalments to be paid
- the terms of repayment
- the rate of interest and all other charges for credit
- APR
- the cost of payment protection or any insurance related to the contract
- required securities
Contracts not meeting these requirements are null and void. Nevertheless, if the consumer receives the money, the contract turns valid. Omitting the interest rate or the APR reduces it to the legal interest rate. Costs not mentioned in the contract do not have to be paid.
aa. Cooling Off Period
Regulated loans entitle the consumer to a two weeks “cooling off period”.
Within that cooling off period, the consumer can withdraw his acceptance. The two weeks period only commences once the consumer has received a written instruction and a copy of the credit agreement. The instruction must clearly state the consumer´s right of withdrawal, the beginning of the two weeks period and name/ address of the creditor.
The withdrawal notice does not need to give reasons. The consumer is obliged to dispatch the notice within the two weeks period.
Before payments are made, sending the notice is sufficient to end the agreement. Once the consumer has received the loan, he may additionally be obliged to pay back any sums received within two weeks of withdrawal or within two weeks of receiving the loan, otherwise the withdrawal does have no effect. However, this requires a separate agreement of the parties and is only possible for agreements signed before 30.06.2005.
The cooling off period plays also a vital role for credits granted for the acquisition of goods or services. Even though two separate contracts exist, they are regarded as a linked transaction, provided they form an “economic unit”. This is for instance presumed whenever creditor and supplier of goods/services have a pre- existing agreement where under the credit is made available and for loans used to pay for goods. Withdrawing the credit agreement or vice versa the contract for the purchase of goods/ services then also cancels the other contract. Under these circumstances, payments received by the trader have to be repaid by the creditor. The written instruction on the cooling off period must inform the consumer about this.
In case of faulty goods, the consumer is entitled to discharge his obligations under the credit agreement as far as he would be entitled to do so under the contract for goods/services. However, if the amount of the sum loaned is less than 200 Euro or the rights arise from a change in the contract of goods/services entered into after signing the credit agreement, no such right exists.
bb. Termination
Loans repayable in more than three instalments can be terminated by the creditor under the following conditions:
- the consumer is behind with at least two instalments, totalling at least 10 per cent of the sum loaned, or in case the agreement is entered into for more than three years, totalling 5 per cent of the loan
- the consumer has been send a default notice setting a deadline of two weeks to repay the amount outstanding
- and has been advised that the creditor is entitled to terminate the agreement if the arrears are not paid within the time limit and that immediate payment of the total amount outstanding and previously not due for payment will be demanded.
Simultaneously, lenders must offer borrowers the opportunity of a discussion. This is supposed to enable the consumer to explain their situation and the lender to give advise. However, no penalty for failing to offer the discussion exists. Lenders may only terminate the agreement upon expiry of the two- weeks period. The termination reduces the price payable: interest and prepaid costs relating to the time outstanding have to be deducted.
In addition, the creditor can terminate the agreement without notice if the financial situation deterioates in a way that endangers the repayment.
Credit agreements for a specified duration at a fixed interest rate can be terminated by consumers six months after receiving the loan with a three month notice period.
Both parties can terminate the contract any time without notice if they have reasonable grounds to do so and if the termination is not disproportionate.

cc. Rate of interest on arrears
Default interest has to be paid on arrears. Payments are charges against costs first, then against the sum outstanding and finally against interest.
b. Deferred Payment /Other Forms of Financial Accommodation
Other forms of credit agreements are deferred payment and other forms of financial accommodation (especially finance lease, hire purchase and credit sales).
Only deferred payments made against payment are regulated. It is sufficient that the creditor receives more than the original price, no matter whether that is achieved by interest, administration fees or instalments exceeding the original price. Deferred payments are treated as loans in every respect. The regulations for finance lease and hire purchase differ marginally as no compulsory content for the written agreement is required.
On the other hand, the conditions for written credit sale agreements vary considerably: Agreements need to give the cash price, the price payable under the credit agreement (including all instalments, interest and charges), the amount of deposit, if any, the number and amount of instalments and the dates on which they fall due, APR, cost of any insurance relates to the credit and the terms on which the consumer becomes the owner of the goods (usually when paying the final instalment). Omitting any of these details renders the contract is null and void unless the goods are handed over. Missing details on the credit price or the APR reduce the interest to the legal one. In case of linked agreements, the consumer may be allowed to return the goods instead of sending a withdrawal notice. The consumer is entitled to a reduction on repaying early: interest and prepaid costs relating to the time outstanding have to be deducted.

2. Comparison: National Law and EU Law
Germany replaced the term “creditor” with the term “trader”, but without effect, for the definition still is the one given in Directive102/87.
With regard to the two- weeks extension period in the event of a delay in payments, Germany is extending the protection offered by the directive. The lender may only terminate the agreement upon expiry of that period, which amounts to a suspension period. The two weeks are supposed to give consumers the opportunity to reflect on the consequences of their default. However, one could argue that reflection at this stage most likely is too late.
Likewise, the opportunity of an discussion to be offered by the creditor is more then the directive asked for. Bringing the parties together can no doubt be useful and may in individual cases be an opportunity to resolve the financial situation. But as no penalty exists for not offering the discussion, it is rather ineffective. Besides, at this stage it is usually to late to protect consumers from over- indebtedness.

3. Main Problems
The main problems concerning consumer credit relate to the costs, namely cost transparency. Consumers are more or less deliberately kept in the dark about the actual costs they have to pay. This is achieved by means of payment protection insurance (PPI) or accident, sickness and unemployment insurance (ASU). Related obstacles are conversion of debt and individual interest rates.
a. PPI and ASU
As a rule, lenders require borrowers either to take out or maintain insurance contracts. Under Germany law, the premiums payable under the insurance only have to be included in the cost for the credit if they are compulsory. However, the contract forms usually always contain an offer for PPI/ ASU: Lenders provide a box on the application form that must be ticked to select PPI or ASU. Also quite common and even worse are application forms in which the insurance is included unless one ticks a tiny box to exclude it. Despite the common place that one should always read a contract before signing it, a surprisingly high number of peoples actually does not do so or , if they do read the contract, simply to not fully understand the meaning of PPI/ ASU. On receiving the prepared contract, they just sign it and are stuck with an insurance, the appropriate box having been ticked by the “thoughtful” bank employee. Not surprisingly, under these circumstances it is difficult to prove that the insurance is not an optional agreement.
Fortunately, the practice of including PPI/ ASU has recently been highlighted by the media in the newspapers and also on TV. One of Germanys leading newspapers had journalists applying for credit: Bank employees neither mentioned the insurance nor enlightened the applicants on additional costs. Only on having been asked most persistently by the journalists, did the employees clarify that an insurance was indeed included. On being asked to exclude any insurance, the journalists were told that their application would then be turned down. This demonstrates that it is almost impossible to get any consumer credit without PPI or ASU.
Apart from obscuring the actual cost of credit, PPI and ASU being “compulsory” components of credit agreements also effectively impedes comparing charges.

For instance, a couple, both already retired, wanted to obtain a loan of Euro 4000. Both of them then signed ASU and PPI contracts costing Euro 3641. The insurance fee had to be paid in advance. As one might expect, the couple could not pay that amount since they then would not have been forced to take out credit in the first place. Accordingly, the credit limit was raised to Euro 7641. As a result, APR was around 40 per cent instead of the advertised 11,98 per cent.
Although it is difficult and time taking, one can only advise consumers to bear this in mind, compare charges as far as it is possible and seek advise before entering into an agreement.

b. Individual Interest Rates
Transparency is further obscured by a new development on the Germany credit market. In Germany, like in most of the other continental Member States, consumer credit is a legal monopoly of banks. With the economy being at standstill, banks have rediscovered consumers after neglecting them in favour of business clients.
Unfortunately, banks now start to introduce methods hitherto unknown in Germany, but common in the UK and the USA: The interest rate to be paid is set in relation to the consumers financial situation, which usually means the income. In the UK, interest rates can thus reach 600- 800 per cent. For instance, consumers having an income of up to Euro 1.500 pay an interest of 12,38 per cent for an instalment credit, while an income above Euro 3.000 cuts the interest to 6,96 per cent. It is quite common nowadays that banks do not advertise just one specified interest, but instead a range of interests from, for example, 5,6 per cent to 16, 99 per cent for a credit repayable in 12- 36 months
As a consequence, consumers earning less have to pay more interest as their solvency is regarded to be low. This is of course highly unfair since a lower income does not say anything about the ability to repay the credit. The main reasons leading to a financial crises are unemployment and illness, both of which can hit consumers with a high income just the same. With an unemployment rate of more than 4.5 millions, obtaining credit is becoming more difficult and expensive for a growing part of society. Likewise, banks now value the applicant´s age higher than they used to when considering credit applications. Therefore, old people nowadays also find it increasingly difficult to obtain credit, even if the do have assets and credit could actually be secured by mortgage on immovable property.
Banks seem less inclined to bear risks. The possibility of receiving less by auction sale under execution simply deters banks from giving credit in these cases. Thus, banks are effectively evading financial risks.
Unfortunately, there is not an awful lot people can do about that. The above named difficulties are fuelled by another trend in Germany. A big Germany company (“Tchibo”, selling coffee/ snacks plus a weekly changing range of products in stores throughout Germany) is acting as a credit broker for Comfort Card Services GmbH which belongs to the Royal Bank of Scotland. They offer loans up to Euro 25.000 with an APR of 7,7 up to 9,9 per cent. Experts fear that this is only the beginning and other British banks will follow, thus circumventing the banking monopoly in Germany and introducing the rating system common to the UK. It is feared that this will result in generally higher interest rates and further deepen the trench between consumers eligible for credit and those cut off from credit for age, unemployment or insufficient income.

c. Conversion of Debt
Another way banks frequently choose to raise profit is conversion of debt. This problem occurs when customers already taking out credit need more money. Commonly, these consumers use their overdraft first. On being advised by the bank on the high interest for overdrafts, they are talked into simply taking out more credit at a lower interest rate to cover their temporary financial crises. Though a brilliant idea at first glance, the realisation is not: Instead of signing a supplementary credit agreement to cover the additional demand, banks persuade them to cancel the existing credit by signing a cancellation agreement and sign a new contract for the whole amount. This is of course to their detriment because it produces enormous costs: Administration fees, charges and premiums for a new PPI have to be paid again and calculated on the whole amount. In individual cases, conversion of debt has resulted in additional costs of approximately Euro 5.000. Since it is very difficult to prove that one has been talked into this, was not fully aware of the costs and thus ill- advised, consumers are usually obliged to pay those artificially generated costs.
Nevertheless, once a consumer is in need of more money, he cannot easily rescue himself by choosing another bank, on the contrary, he is often stuck with his bank as another banks will not grant credit to consumers already undergoing obvious financial difficulties.
d. Other Problems
Another aspect consumers sometimes tend to neglect, is the importance to match the repayment period to the “useful life” of the thing bought. As advertisers constantly tell us to live now and pay later, people tend to indulge in amenities now, but forget about the repayment lurking in the future. However, no one wants to repay a loan for a holiday which was taken years ago.
Even though the original directive introduced the term consumer decades ago,
one uncertainty related to it has still not been solved by the Germany courts. With respect to being regarded by the courts as a consumer, different views exist when several persons enter into a credit agreement but not all of them are consumers. Lower courts have held that if just one of the persons cannot be regarded as a consumer, the others are not treated either and the credit agreement as a whole is not treated as a consumer credit. However, other courts tend to look at each person individually and regard their consumer status accordingly. It remains to be seen what the Germany Federal Court will rule on that.