In banking, collateral refers to objects and claims of the borrower to third parties that are technically deposited or can be used in the context of security transfer. The bank can realize the collateral as soon as the borrower no longer fulfills its obligations under the loan agreement in due time.
Lending without collateral in the technical sense
In terms of banking terminology, almost every consumer loan is basically a loan without collateral, since the borrower does not provide any specific loan collateral. One of the few exceptions is the car loan, in which the financed vehicle is usually assigned as security. The borrower’s regular working income serves as a substitute for possible loan security.
However, it is only a security in the strict sense of the term if the credit agreement provides for wage transfer. Furthermore, the part of the income that exceeds the garnishment-free limit can be assessed as credit security, since the financial institution can access this in the event of failure to pay back. For this reason, financial institutions sometimes refuse to pay the loan if the income is below the garnishment limit, even if the household bill shows that their potential customer can pay the loan installments.
Lending without collateral in colloquial sense
Deviating from the banking language, the colloquial language usually describes a loan as being given without collateral if the borrower is neither able to provide real security, nor can he assign claims and at the same time does not have a regular income from work. According to this definition, lending to people with strongly fluctuating income as well as loan disbursement to employees with multiple employment relationships are each a loan without collateral.
In this case, borrowing without proof of salary is a good idea, with the borrower indicating his average income. Deliberate misrepresentation of the amount of income is not permitted and, if discovered in spite of punctual payment of the credit installments, can lead to the bank terminating the loan. A positive Credit Bureau information increases the chance of obtaining a loan without collateral; in itself, it is less a guarantee of credit than a confirmation that the applicant has duly met his financial obligations in the past.
As an alternative to a loan without collateral from a credit bank, an organized private loan can be taken out via a corresponding internet platform. Many of the private lenders base their decisions more on social criteria and the intended use of the loan than on loan collateral.
The certificate of earnings in the narrower sense is an official form, which must be submitted when applying for an increase through the job center and some other social benefits. Both consumers and financial institutions use the term predominantly in a broader sense and also refer to the usual pay slip or, in the case of the self-employed, the current tax assessment as a certificate of earnings.
Dispensing with the certificate of earnings accelerates lending
The fact that banks in some cases grant a loan without a certificate of earnings speeds up the processing of the loan application. Documents that are not to be submitted do not have to be checked, and even if proof of income is submitted, it is often only possible to carry out a random or superficial check of the submitted documents. Lending without submitting a certificate of earnings is tied to a loan amount that is not too high and largely to good Credit Bureau information.
Traditionally, mail order companies agree to pay in installments as a earmarked loan without a certificate of earnings, since they only request proof of income if the order amounts are unusually high. Banks usually grant their customers the overdraft facility without a certificate of earnings because they can determine the incoming payments based on the account movements. Even when applying for a new credit card, an initially low credit limit is usual as a loan without a certificate of earnings; Many issuers only require this if their new customer immediately requests a higher credit limit than the usual one.
What does the customer look for when applying for a loan without a certificate of earnings?
The fact that the bank grants a loan without a certificate of earnings does not release the customer from the obligation to provide honest information about his or her income from work in the loan application. Incorrectly entered incorrect income data means that the bank may terminate the loan without notice, even if all credit installments have been received on time. The loan without a certificate of earnings prevents the discussion of which income components are to be considered as income for the lending.
If the loan applicant receives part of his income irregularly, he can average it. At the same time, he makes sure not to agree the monthly loan installments too high; it can be reduced by choosing a longer loan term. In addition to a bank, loans can be taken out without an earnings certificate via an internet platform for arranging personal loans. The private lenders registered there are largely based more on social criteria and the intended use of the loan than on the demonstrable income of the applicants.