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Overcoming Germans’ aversion to debt: free loans

DDR – Mark-Scheine 1973
Do you need a haircut on your loan? Source: DPA.

Germans are notoriously allergic to debt. They have fewer credit cards than in any other major country and less household debt as a percentage of GDP than all but two other western European nations: Italy and Austria. Even in the age of rampant online shopping, 80 percent of all purchases are still made in hard cash, according to the Bundesbank, Germany’s central bank.

So how does a start-up company that makes profits by getting people to borrow money accomplish that nearly impossible task in tight-fisted Germany? By offering loans at negative interest.

That’s right. Borrow €1,000 ($1,230) for 36 months, and these firms will not only not charge the borrower interest, but will pay a 5-percent bonus for the privilege of lending them money. Admittedly, that’s only €50, but that shows how desperate they are.

The extraordinary loans are being offered as part of an aggressive marketing campaign by two online portals that offer consumers comparisons on loan rates, Check24.de and Smava.de, which are the German equivalent of Lending Tree in North America. The competition between them is now so heated that in the few hours this article was being written, the negative interest being offered by the two companies shot up from 3.5 percent to 5 percent.

“Probably only those who don’t need it receive the loan.”

Nils Nauhauser, consumer protection official

“Smava offers the cheapest loans in Germany,” boasted CEO Alexander Artopé. “Never before have borrowers benefitted so much from low interest rates and competition.” Christian Nau, head of Check24, wouldn’t be outdone. “We always offer customers the cheapest rates in the market,” he said.

The cheap loan offers come at a time when Germany’s banks are at a crucial inflection point. Old established institutions like Deutsche Bank and Commerzbank are bleeding money because they are over-staffed and over-branched, and are now coming under fire from a phalanx of agile online competitors that can undercut their rivals’ business because they are more mobile-savvy and have virtually no overhead. Unlike in the UK or the US, in Germany it’s much harder to lay off staff, even when they are no longer needed.

The late American economist Milton Friedman once suggested in jest that when consumers wouldn’t borrow and the economy was tanking, bankers should throw money out of a helicopter to get the economy working again. But there is nothing wrong with the German economy. It grew a robust 2.2 percent in 2017. It’s just that Germans don’t like to borrow. The country was traumatized by the hyperinflation of the 1920s, when one US dollar reached a peak of 4.2 trillion Deutsche marks.

Although official interest rates in Germany are near zero, most banks still charge around 2 percent for a consumer loan of this size. To qualify, borrowers have to show excellent credit and a salary that covers all their expenses. The money can’t be used to pay for an overdraft at another bank.

“Probably only those who don’t need it receive the loan in the end,” said Nils Nauhauser of the consumer protection for Baden-Württemberg.

27 Tight-fisted Germans-01

For the two companies involved, it’s not just a matter of getting eyeballs on their web pages. Once someone applies for the loan, even if they don’t get it, the website has obtained copious details about their finances. Such valuable information is getting much harder to find in the European Union because of data protection laws, so they could use the material for years to come to offer financial products like insurance and even cheaper utilities or simply resell to other banks.

But accepting the loan could have a downside for consumers. Germany has a credit rating bureau, the Schutzgemeinschaft für allgemeine Kreditsicherung, which is known to Germans as Schufa, and is similar to Experian in the US. Schufa is a private company that assesses the creditworthiness of about three-quarters of all Germans and over 5 million companies in the country. The company keeps track of consumer borrowing and too many loans could indicate that a credit prospect is a bad risk.

In fact, a rival comparison portal called FMH reported that one consumer who had a record of many small loans was later denied a mortgage because of his frequent dips into credits. “Anyone who needs to borrow 1,000 euros does not have a good credit rating,” FMH’s director, Max Herbst said.

Laura de la Motte is an editor on Handelsblatt’s finance desk and Charles Wallace is an editor for Handelsblatt Global in New York. To contact the authors: delamotte@handelsblatt.com and c.wallace@extern.handelsblatt.com.

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