A personal loan – also known in Switzerland as a small loan or instant loan – is a loan in which the lender does not act commercially (ie as a credit institution within the meaning of the German Banking Act) but as a private individual.
The personal loan is suitable for those who want to transfer a debt or need to make a high value purchase but do not want to use the credit card limit. Borrowing from an institution requires planning, you will be honoring your good paying commitment. But what if you have an unexpected and can no longer pay the installments?
Demarcation “commercial” / “private”
According to the German Banking Act, credit institutions are companies that conduct banking business or to an extent that requires business operations.
The credit contract is regulated in §§ 488 ff BGB. In principle, the same rules apply to personal loans and small loans as to bank loans.
However, a number of property rights no longer apply to the borrower:
- Formal requirements for a consumer loan contract (§§ 491 and 492 BGB)
- Protection against dismissal (§ 498 BGB: total due date for installment loans)
Risks of personal loan contracts
Free form of loan contracts
Personal loans can be closed informally. This possibility naturally leads to problems of proof in the case of reclaims. For security reasons, personal loan contracts should therefore always be concluded in writing.
Negative risk selection
In many cases, the desire for personal loans or instant loans arises from bank loan rejection. The bank examines the credit risk and decides not to bear this risk. Putting out such a loan as a private individual means taking a significantly higher credit risk.
All collateral customary in banking can also be agreed by private individuals. A risk arises here from the need to formulate legally correct collateral contracts and to monitor compliance.
Tax treatment of personal loans
Another motivation for loans such as small loans and personal loans is the possibility of tax structuring. In particular, the financing of rented real estate or business investments is often carried out through private loans instead of equity.
For tax purposes, a personal loan is equivalent to a bank loan in Switzerland, provided the conditions (interest rate, collateral, etc.) and the current implementation allows an external comparison.
In any case, it is tax-damaging to conclude the loan (even if it is only a small loan) “only on paper”.