MONDAY, JUNE 14, 2021
Credit without proof of income: Fast money without complications?
The most important facts in brief
Everyone who lends money wants one hundred percent certainty that they will not only get back the amount lent, but also all the interest. Therefore, banks in particular usually require proof of income - that is, proof that the borrower has a regular income, which gives the theoretical possibility that he will be able to repay the loan. However, there are also loans without proof of income; a special form of credit that makes perfect sense for many people and situations.
Why the proof of income is needed
Banks are not charitable organizations, of course, but operate according to market principles just like any other business. The only difference is that they do not make their revenues or profits by selling physical products, but by lending money:
- The bank grants a loan for a credit amount X
- in return, it is repaid a loan amount Y over the term of the loan
- Y is always greater than X, because the “lending fee” is the interest that the borrower has to pay.
The banks always take a long-term risk. This is because the disbursement of a loan to the borrower is made from their cash reserves in one fell swoop; in other words, the bank makes an advance payment. Repayment, on the other hand, takes place over a much longer period. At least a few months, in many cases even years, and in the case of some loans - think of loans for building a house - even decades.
And, of course, a bank doesn’t lend to just one person; depending on its size, it has hundreds or thousands of borrowers at any given time from whom it wants to get money back. If one of them did not pay, that would already be annoying. However, if several of them fail to service their loan at the same time, the bank would quickly find itself in trouble - much like a freelancer for whom many customers fail to pay their bill.
To keep the number of non-repayers as small as possible, preferably even to zero, the bank therefore demands extensive documentation from each potential borrower as a prerequisite before closing. The aim is to make the applicant’s creditworthiness as transparent as possible to the bank. This is the only way the bank can know who it is dealing with in financial terms and how likely that person is to repay the loan granted in full and with interest.
How banks check the solvency
In order to get money from the bank, the bank performs a so-called credit check. Specifically, this contains the following:
- General data about the person (address, marital status, etc.).
- The profession as well as the type, regularity and amount of income - this is the proof of income. In the case of employees, it usually includes the last three pay slips, but (in the case of other persons) it can also extend to tax returns, bank statements and the like
- Information on payment behavior and financial circumstances. For example, whether there have been any defaults on past loans, how many accounts the applicant has or whether he owns any property worth money. The Schufa score or other data provided by Schufa is normally used for this purpose.
This considerably reduces the risk for the bank. The Schufa score in particular contributes to this, since Schufa has such extensive information on the vast majority of private individuals in the United States and does nothing other than increase and refine this information on a daily basis.
The only thing is that there are some catches for the borrower:
- It is a very lengthy and costly procedure. Because, of course, it takes time to gather and evaluate all the documents. If you need money quickly, it can take too much time for your needs.
- Not everyone can provide proof of income. Freelancers, for example, who have only recently started working on their own account, or housewives and househusbands, students, the unemployed or freelance artists. And sometimes the proof of income just can’t be up to date enough. But again, imagine a freelancer with tax records as proof, but they may be a few months old at the time of application.
In addition, double-checking income and Schufa can also be a problem. For example, if someone can prove a regular income, but for some reason there is a negative Schufa entry.
In all these cases, the understandable and conservative approach of many banks can simply be too conservative. Especially with regard to income, the approach of many lenders is also downright overcautious.
What loans are available without proof of income
Their conservative approach actually also has disadvantages for the banks. This is because they are foregoing quite a large group of potential customers and thus also income via interest, follow-up orders, even good advertising through word of mouth. So all in all, insisting on proof of income can also have a negative impact. That’s why a lot has changed in the industry in recent years - not so much among established lenders as, for example, among purely online banks, so-called direct banks, and credit brokers.
The latter have come to realize that the risk is actually negligible, especially with small loan amounts - not least because the interest portion is extremely low anyway thanks to the low-interest phase, so that the institutions hardly make any profit. This has led to the fact that today there are several ways to get a loan without proof of income:
A small or mini loan
This loan is also known under the name “housewife loan” for many years - because housewives without their own income were once the most important target group. This loan is characterized by the fact that it involves very small sums. We are talking here about the range between about 100 and 3000 dollar. It is offered by a large number of institutions. As a security, the lender mainly uses the entry in the Schufa, which is usually sufficient because of the short term, so that no disproportionate risk arises.
A personal loan
This loan can be understood literally as a loan between two known private individuals or through an (online) platform as an intermediary. Here it depends on the exact degree of acquaintance. If you borrow money from your aunt, for example, both the proof of income and the Schufa query can be omitted. In the case of personal loans via online platforms, the Schufa can be omitted, but this is then usually bought by enormous interest rates. Caution, here are often also dubious providers.
A loan with additional collateral
Proof of income is only one requirement that must be met for security. In addition, there are other, but equivalent ways to prove your creditworthiness. For example, you could prove that you are in possession of something whose value is at least as high as the loan amount plus interest - such as a car, real estate or similar. And if you can’t provide this proof yourself, then perhaps another person can. This person would then act as a guarantor for the loan, guaranteeing that he or she would take over repayment in the event that you become insolvent.
A loan against collateral
You own something that is worth money: a car or a life insurance policy. Then you have the option of having these things mortgaged. This means that if you do not pay back the money, the lender can freely dispose of the loaned asset. The simplest form of this is a pawnshop. For example, you bring a piece of jewelry there, get a payout and have to pay back this sum plus interest after an agreed period of time, otherwise the jewelry belongs to the pawnbroker; this even works completely without Schufa and proof of income and is very fast. However: There is a big difference between the mortgage lending value, i.e. what the item is actually worth, and the payout - for the latter there is a lending limit that is several percent lower than the mortgage lending value.
Disadvantages of loans without proof of income
Once apart from the mini loan, the risk without the proof of income increases for every bank - even if it is only a completely theoretical risk. As a substitute for this less transparent credit rating, most providers then tend to increase the interest rate. That means the “lending fee” for the money increases, you have to pay back more money in total and, depending on the type of loan, more money each month. Depending on the amount, a loan without proof of income can quickly become much more expensive than what would normally be paid for it.
In addition, the need arises for you to have to compare much more. There are now many providers, all with different interest rates, all with different levels of seriousness. And if your creditworthiness is poor anyway, you are partly missing a security mechanism - if you had proof of salary, someone would probably tell you quite clearly at this point: “You can’t afford that”.
Loans without proof of income and Schufa query
Loans without proof of income or Schufa query are possible, but very, very rare. Such loans are for the lender “without net and double bottom”, so very risky. Therefore, unrealistically high interest rates are taken here and there are only a few reputable providers - so better fingers off!
Conditions for a loan without proof of income
Of course, the procedure differs from provider to provider. However, the following should be a prerequisite:
- You need a US checking account, a Us ID and must have your main residence in United States.
- You should have a clean record with Schufa. So no current negative entries. If necessary, check this beforehand by requesting a self-disclosure according to Article 15 DSGVO; this is possible once a year free of charge.
- Calculate very precisely how much you really need and apply for the loan according to the maxim “as much as necessary, as little as possible” - remember the usually increased interest rates.
The lender may not require proof of income, but you yourself should know exactly that your credit rating is sufficient and that you will be able to repay everything over the term without any problems.
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