What is Installment Loan?
Quick Summary
An installment loan is a loan repaid in fixed monthly payments over an agreed term. Every payment carries an interest portion and a principal portion. In German law it is a consumer loan agreement under sections 491 and following of the Civil Code (BGB).
Definition in Detail
The installment loan (also called consumer or personal loan) is a loan with the following characteristics:
- Fixed monthly payment: Constant payment throughout the entire term
- Defined term: fixed in the contract and unchanged until the end
- Fixed interest rate: The interest rate remains unchanged for the term
- Annuity principle: Payment contains interest and principal portions
Installment loans are issued without purpose restriction (free use) or purpose-bound, for example as a car loan. With a purpose-bound loan the financed item often serves as security, which is why banks usually offer better conditions for it.
Advantages and Disadvantages
Advantages
- • Predictable, fixed monthly payment
- • Interest rate security over term
- • Early repayment possible
- • Fast processing/disbursement
- • No collateral required
Disadvantages
- • High interest with poor credit
- • Credit check required
- • Credit bureau entry
- • Early repayment penalty possible
- • Long-term commitment
Tips for Installment Loans
- 1Compare multiple offers: Interest rates differ between providers, so comparing several offers before you sign is worthwhile.
- 2Check the effective interest rate: Always compare the effective interest rate, not the nominal rate – only it shows the actual costs.
- 3Arrange early repayment options: Look for the possibility of free early repayment.
- 4Critically examine payment protection insurance: It is often expensive and not always useful.
Frequently Asked Questions
What requirements do I need for an installment loan?
Lenders normally expect you to be of legal age, resident in Germany, in regular employment or with regular income, holding a German bank account and with sufficient credit standing. Before any contract is signed the lender must assess your creditworthiness anyway, under section 505a BGB. Some banks additionally set a minimum income.
How high are the interest rates for an installment loan?
There is no single rate. The lender sets it individually based on your credit profile, the loan amount and the term, so two applicants can receive very different offers for the same loan. Compare the effective annual rate of the offers you actually receive, because only that figure includes all mandatory costs.
Can I repay an installment loan early?
Yes. With a general consumer loan you may repay in full or in part at any time. Under section 502 of the German Civil Code (BGB) the lender may only claim compensation if a fixed borrowing rate was agreed. That claim carries two caps: at most 1 percent of the amount repaid early, at most 0.5 percent if no more than one year of the term remains, and never more than the interest that would still have accrued until the agreed end date. In two situations the claim lapses entirely, for example when the contract does not properly explain how the compensation is calculated.
What is better: short or long term?
Short terms mean higher monthly payments but less total interest. Long terms lower the monthly burden but cost more interest overall. Choose a payment that fits comfortably in your budget.
Does an installment loan affect my credit score?
Yes, the contract is reported to SCHUFA. A running loan serviced as agreed counts as a positive entry, and SCHUFA lists loan status as a scoring criterion in its own right. At the same time the number of installment loans taken out is a separate criterion, so several loans running in parallel can push the score down. Real damage comes from missed payments.
Legal Notice
Installment loans fall under the German rules on consumer loan agreements in sections 491 and following of the Civil Code (BGB). Lenders must state the effective annual rate under section 16 of the Price Indication Ordinance (PAngV); section 17 PAngV applies additionally to advertising. The withdrawal period is 14 days under section 355(2) BGB, but under section 356b BGB it does not start until you hold the contract document with all mandatory particulars; if those are missing it extends to one month from the moment they are supplied. On 20 November 2026 the German act implementing Directive (EU) 2023/2225 enters into force (Federal Law Gazette I 2026 no. 139). The caps in section 502 BGB stay unchanged, while sections 491, 495 and 505a BGB are recast; contracts existing before that date remain under the old law. Status: 26 August 2026.