There may be a variety of situations in which a borrower wishes to have a loan taken by him or her transferred to a third person – for example, with the family. The idea of a “loan transfer” is always linked to a change of debtor and requires the approval of the lender. In order to properly and legally transfer a loan, there are different ways to go from one bank to the next, although a certain number of formalities must always be complied with. The following article deals with the subject of “credit transfer” and contains all important requirements as well as numerous tips for the best possible implementation.
Why can a loan transfer make sense?
The procedure of credit transfer can be particularly advantageous when credit-related monetary transactions are made within the family and thereby “clean” to be separated from each other. Example: A father buys a car for his son (still a student) through car financing. Three years later, the son is working and wants to repay the loan on his own. In order to adapt the loan agreement to the actual ownership, the father decides to transfer a loan, so that his son not only takes over the installment payment (could be achieved with the help of a move-in change), but actually becomes the borrower. Irrespective of money transactions with the family, a loan transfer may also be useful in connection with third parties. These are above all situations in which the participants, ie the original or the new borrower, can profit financially from the debtor change. This may, for example, be related to a home sale and the fact that the original borrower had a current loan agreement on very favorable terms.
In this example, a loan may be advantageous for the buyer or new borrower, as he would otherwise have to finance the money at current and possibly more expensive terms. Depending on the terms of the contract, the original borrower will save himself the payment of a possible early repayment penalty if he can “pass on” the original loan to the buyer rather than repaying it prematurely through the purchase price.
The loan transfer from the perspective of the lender
From the point of view of the lender, the project of a credit transfer has to be considered critical. This is related to the fact that the bank does not want to deteriorate with regard to the existing loan agreement with regard to the guarantee. The new and receiving borrower should therefore always have sufficient and ideally at least the same credit rating as the original borrower. Above all, it is important for the bank that the loan transfer requested by the borrower does not create an “increased risk”. This is mainly due to the fact that the risk classification of the original borrower at the time of borrowing was decisive for determining the interest rate. Since the typical credit parameters such as interest rate, debit interest or repayments remain unaffected in a pure credit transfer, banks also demand the same security. As there is no evidence of late loan transfer in most standard loan agreements, borrowers are generally not entitled to a debtor bill. It therefore always depends on the goodwill behavior and benevolence of the respective bank. From a bank’s perspective, the new borrower must first be put through its paces in order to determine whether sufficient creditworthiness exists for the continuation of the existing loan agreement. Most banks set the same standards and criteria as the original lending.
These requirements must be fulfilled for a credit transfer
In short, it can be said that a natural person to take over an existing loan must always meet the same criteria as in a new contract. The new borrower must be able to prove creditworthiness and creditworthiness in this context, for example at least 18 years old. In addition, the borrower must receive a regular income that provides sufficient debt servicing capacity as measured by the installment amount of the existing contract. Overall, the creditworthiness should be smooth, which is why a positive Private credit information for most banks is also an absolute requirement for the consent of a debtor change. Since the bank may not yet know the new debtor in comparison to the original borrower, it is not uncommon for banks to submit bank statements from the new borrower. The banks can use the extracts of the payroll account to obtain detailed information on the payment behavior of the new borrower, which may be decisive for the decision to change debtors. Last but not least, all formalities, such as special forms for each bank, must be completed in full and signed by all concerned. The desired credit transfer must be recorded in writing, so that it is really effective and leaves nothing to be desired in view of the further loan repayment.
Best practice: This is how you should proceed when transferring a loan
Whenever a debtor change is desired, the personal interview with the respective bank should be sought from the beginning. First of all, the bank has to agree to the transfer of credit anyway, and when it comes to planning the debtor bill, it is clearly an advantage if the bank is involved from the outset. By doing so, “unnecessary effort” (for example, since it is clear from the outset that the new debtor does not meet the necessary requirements) can be avoided and a time-saving process can be achieved. Also with regard to possibly incurred costs for the credit transfer should be spoken immediately with a personal contact person of the participating credit institution. The expertise of the experts is always very important in loan transfers, as the transfer agreement could provide a single, unfortunate wording that would not exempt the original borrower one hundred percent from the obligations of the credit agreement.
Conclusion: There may be different reasons for a loan transfer, but it is important that a desired debtor change is always well prepared and agreed with the participating bank. In general, banks must always agree to a loan transfer, which is why the new borrower must meet all the typical criteria for lending. From a banking perspective, it is especially important that the securing of the loan or the default risk does not worsen due to the desired transfer. For a debtor change you should personally from the beginning to seek advice from the respective bank, in the end to achieve a legally effective and satisfactory for all parties result.