What are the differences in lending in Germany and the U.S.

Lending in Germany and the USA

In America, it is not uncommon to buy many things on “credit.” The German mentality, however, is completely different. Here, loans and credit cards play a subordinate role compared to the U.S., as can be seen in the home ownership rate alone. However, not only in credit card use, but also in lending, different modalities are decisive in Germany and the USA. This raises the question of how creditworthiness is assessed in the U.S. and whether it is easier to obtain a loan in the U.S. than in Germany.

Credit cards are used more frequently in America than in Germany

Credit card use is taken for granted by the average American. In Germany, credit cards are considered more of an exception.  It is often used when the classic EC card is no longer sufficient, e.g. at an online store. For this purpose, banks often offer the so-called debit credit cards. This credit card does not grant the customer credit, but is based on credit.

When it comes to a debit card, it is not real credit cards, even if there are many offers with high embossing today. The bottom line is that debit credit card users are not taking out credit, they are using their existing balance that they have loaded onto the card and can use to pay in stores and online. For Americans, paying with credit cards is commonplace and thus a matter of course, which is unimaginable in this country due to various restrictions. For example, anyone who wants to pay with a credit card at the bakery or the supermarket they trust will not infrequently face the problem of rejection in Germany.

Credit check for loans in Germany and the USA

If you want to apply for a loan in Germany, the SCHUFA is still the measure of all things. The institution to which you submit the request will make inquiries from Schufa and from your house bank, as well as from other credit agencies. If you have had problems with Schufa in the past and have not paid bills on time, for example, the entry in the directory informing you of this will lead to the immediate rejection of the loan application. In the USA, creditworthiness is also checked when loans are granted. A check of the credit score is common, but is less likely to stand in the way of the loan being granted than a check with Schufa. Another reason that differentiates lending in Germany and the U.S. is the tolerance threshold with regard to creditworthiness. In Germany, once you are in the Schufa, you are still in the dark for many years after the entry and have a hard time getting your credit rating back up to a creditworthiness level. For larger sums, the creditworthiness of the applicant is checked when loans are granted in Germany and the USA. Nevertheless, American applicants have the proverbial better cards, since even minor problems with the credit score do not lead to the immediate rejection of an application.

Borrowing easier in the USA than in Germany

The term debt has a completely negative connotation in Germany. Anyone who has debts cannot manage properly, earns too little or has not behaved well toward a contractual partner. In the USA, these terms are of marginal relevance in connection with debt. Of course, before a loan is granted in Germany and the U.S., it is checked whether the applicant can repay the amount in the agreed time. But this is where the difference between the credit cultures becomes clear. While Schufa in Germany collects data over many years, incorporates the living environment and other non-personal factors into the credit rating, the only thing that counts for an American bank is the “here and now” – and thus the applicant’s actual financial background. In the U.S., it is much easier to buy a house and take out major financing. The security for the bank is based on a mortgage, which does not make the borrower uncomfortable and provides the bank with the desired security. In the U.S., the difference between an excellent credit rating and a negative one may well be 20 percentage points. In Germany, applicants with a score of 80 to 90 percent already show a significantly increased to high risk. The problem is based on the rating system, which makes it difficult for German borrowers and is viewed much more tolerantly in the USA.

Who besides Schufa decides whether to grant a loan?

In Germany and in the USA, the credit approval mechanisms are completely different. You can rely on a bank or independent lender to check not only with Schufa, but also with other credit bureaus. In the U.S., on the other hand, there is only one credit score, which on top of that has much more leeway than the score known in this country. The granting of credit is very different in Germany and the USA. Especially for people with negative Schufa, it is impossible in Germany to finance a major purchase through a reputable bank without sufficient collateral.

Different credit requirements in the USA than in Germany

It is obvious and cannot be denied: Credit requirements in Germany and the U.S. are far apart. Tolerance is a foreign word when it comes to larger loans in Germany, as the present is of little importance compared to the past and alternative values. In the U.S., locals are given multiple opportunities and are measured against the present. Thus, larger purchases can be made in America, even if one has not always paid one’s bills on time in the past.