Way to Interest Free Loans
May 16, 2019
Now that one hears from more and more banks the information in the so-called discretionary loans to waive the usual market interest rates or at least appropriate planning in this direction, the question arises why banks actually want to do so. Is this perhaps the way to generally interest-free loans ? Maybe these interest-free loans have not existed long ago? We have investigated the question and would like to shed some light on this topic with this new article.
Why banks charge interest
It is clear that banks in Germany generally ask for any kind of credit interest on the loan amount and for good reason, because these interest rates are a source of income for banks, from which among other things, the banking operation as such (staff, technical infrastructure, etc. ) is refinanced. In this respect, bank customers are accustomed, when taking out a loan, to repay the interest associated with this loan to the lending bank for the agreed repayment term. Anyone who has wondered why loan interest rates are always significantly higher than interest on savings deposits should be explained by the following: The difference between the interest earned by the bank on money lending and the interest paid by the bank through savings deposits is created as an interest margin and is decisive for the profit of a credit institution. Without this interest margin, a bank is basically not viable!
The interest-free loan
Many people associate the interest-free loan with a zero-percent financing, a private loan from a relative or, at best, an interest-free loan from the Employment Agency or BAföG, some of which are not interest-bearing Credit acts. Where, however, the classic installment loan from a branch or direct bank probably comes to the least people directly to mind. But that’s exactly the point: There are these classic installment loans from a bank really interest-free – the keyword here is: Islamic Banking!
How does the interest-free loan work?
Islamic banking follows a rather simple but deep-rooted rule: interest is prohibited! And so banks that are committed to Islamic banking, loans to Muslims as well as non-Muslims forgive basically interest-free. However, the question arises as to how such a bank can survive financially due to the loss of interest income? The solution is as simple as it is effective: when lending, the bank also acts as a dealer for the goods to be financed.
In practice, this is how it works: the bank first acquires the good that a consumer wants to finance through a loan – for example a new car, a real estate or even an electrical appliance – directly from the provider and then sells the good to the borrower. The desired profit for the bank arises from the fact that the bank levies a so-called financing or profit premium in addition to the actual acquisition value. This profit increase basically corresponds to an interest in its function. For the consumer, this does not change anything, because he simply pays the bank rates agreed with the bank.
More about this interesting topic can be found here
Even though there are not too many financial institutions operating in Germany under the aspect of Islamic banking, non-interest-bearing loans are a real financial service and do not refer solely to an interest-free trade credit.