Consolidating your loans in Germany

Are you paying off several loans and want to consolidate them into one payment? Or, are you paying insanely high interest rates that you’d like to lower? If this sounds like you, it definitely makes sense to consider debt consolidation. Here, we’ll explain the process of loan consolidation, what factors you should consider, and how it may affect your Schufa score. Let’s go!

First, let’s have a look at what loan consolidation really means. When you consolidate a loan, you’re replacing several loans with one single loan. This can be done with nearly any kind of loan, with the exception of real estate financing.

Tip: the German translation here is tricky—the official translation of “loan consolidation” for individuals in German is Kredit umschulden, not to be confused with the more direct translation, Schuldenkonsolidierung, which refers to another type of debt consolidation available only to major corporations.

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1. You want to get a better overview of your loans

Are you slowly losing track of your car loan, student loan, or overdraft payments? When you consolidate multiple loans into a single loan, you can simplify your finances by focusing on one, single loan payment.

2. You need to lower your interest rate(s)

Perhaps you found a better offer with a lower interest rate, or you’d like to combine your low and high interest loans into one manageable payment. If so, loan consolidation could be a great fit.

3. You want to improve your credit rating

The number of active loans you have can negatively impact your Schufa score—and your credit rating. Consolidating your loans can help you improve your Schufa score over the long term. 

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As you can see, there are many good reasons to consider consolidating your loans. But in which cases does it really make sense?

First, it’s helpful to sit down and review all your current loans. Pay particular attention to the remaining term, your current monthly installments, and the annual interest.

If you pay off your loan before the end of the loan term, your bank can request a compensation payment. This is because the bank loses interest income when you pay your loan off early. In the case of installment loans, however, this is regulated by law—the penalty sum may not exceed 1% of the remaining debt if, according to the repayment plan, more than 12 installments are outstanding when the debt is paid off.

Given this, it makes sense to check your loan contract for any clauses related to a prepayment penalty, and calculate how high it might be before proceeding. 

Do you struggle to make ends meet at the end of the month and need to rely heavily on overdraft? If so, you might want to consider taking out an installment loan instead. Here, you’ll pay a certain rate each month that’s likely lower than interest charged by a bank overdraft. And, because you’re not replacing an existing loan, there’s no prepayment penalty—simply pay it off whenever you’re able to.

Now you should have a good idea whether loan consolidation is right for you. Let’s look at some other questions that might come up.

Generally speaking, you could consolidate your loans with your current bank. However, if you’re looking for a better offer with lower interest rates, then it definitely makes sense to consider other banks as well. 

At this point you might have heard about the Schufa (if not, check out our guide here). But what does the Schufa have to do with you consolidating your loans?

In general, when you apply for a new loan, a bank will check your credit rating. While doing so, they will also check your Schufa score. If you have a low or negative score, the bank may consider it too risky to give you another loan, even if it’s simply consolidating existing loans. 

Given this, it’s a good idea to check your Schufa score beforehand (you have the chance to do this once a year for free). This way, you’ll learn more about your credit rating and can take steps toward improving it if need be. 

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