Why are credit terms better for civil servants?
From the point of view of banks, a significant part of the cost of a loan is the risk of default: any unreturned loan has a negative impact on the equity base of the lending bank. The credit default risk in the retail banking business accounts for the most part for a handful of events:
Unemployment, illness, divorce and unreasonable consumer behavior are the main reasons for payment problems with all the consequences that follow, including credit default. Civil servants are better protected against the risks of unemployment and illness than other occupational groups. The associated lower credit default risk has an impact on the bank’s costs and thus indirectly on the terms of loans for civil servants.
How are privileged conditions actually visible?
The more favorable conditions are reflected in the effective interest rates, which should, ceteris paribus, be lower than for other occupational groups. Civil servants can best use their risk advantage for loans with credit-based interest rates. While fixed-rate loans are usually very straightforward, they close large parts of the price potential available to civil servants.
In addition to the interest rate, other elements of the terms and conditions of civil servant loans are always more favorable, provided that banks insist on setting the interest rates depending on their profession. Civil servants can claim longer maturities: while “ordinary” installment loans must be repaid after a maximum of ten years, specialized products designed for repayment loans have terms of up to 20 years for civil servants.
Another special feature concerns the acceptance criteria for existing negative features. While in this case self-employed persons and permanent employees can only receive loans from individual banks, the offer for civil servants in this case is even more than an exception. This applies in particular to smaller, interim credit bureau entries. Hard negative features such as EV, bankruptcy, etc. are of course a reason for exclusion even for state servants.
What are the limits of the benefits of civil service loans?
The benefits of lending are significant, but not limitless. Effective interest rates are rarely more than 100-150 basis points lower than non-civil servant applicants with good credit ratings. It should be taken into account that the scores of credit agencies such as credit bureau also play a decisive role for civil servants. The official status alone does not guarantee advantageous scores.
In addition, banks are only willing to lend to a certain extent if their credit rating is bad. The fact that officials receive credit in every situation is a fallacy. After all, it is important to take into account the individual maximum resilience, which is statistically more exhausted by public servants than by other occupational groups. The fact that a (small) part of the civil servants are already highly indebted at a young age counteracts the advantages of the statistical credit default risk.
Are official loans worthwhile with repayment vehicles?
As a “civil servant loan” repayment loans are usually sold with repayment vehicles. For loans with maturity of up to 240 months, the monthly installment is made up of (over time decreasing) interest payments and a (constant, linear) repayment. The latter does not take place directly in favor of the loan account, but is paid into a contractually fixed repayment vehicle such as a life or annuity insurance or fund.
With the capital started in the redemption fund, the loan is finally redeemed. An added value can be generated if the return on the repayment instrument exceeds the lending rate or, unlike the fixed interest rate, rises over time. In the context of historically low interest rates, this variant may be appropriate. Borrowers must, however, take into account that the return on the asset is not guaranteed (if a minimum rate of return is guaranteed, it will be lower than the loan interest rate) and that the repayment vehicle may incur closure and administrative costs,
Alternatives to loans with land register entry
The terms and conditions of civil service loans may be so favorable that the loans can be used as an alternative to mortgage-backed loans. This saves costs for the land register entry and negotiations with already secured by such banks. In particular for modernization and refurbishment purposes, ordinary loans without a mortgage for civil servants are possible.