Lending: Mastering the differences between theory and practice

Credit is an important part of business administration. For companies such as private consumers, one of the most important methods of increasing liquidity is to finance various purchases with a loan. Mastering the principle of lending and calculating the principal interest is unfortunately not to be equated with practical knowledge in the credit system. Even without your own credit requirement, it makes sense to shed light on the practical side of lending with expert partners.

Closing a loan - more than just calculating the repayment installments

When entering the diverse world of business administration, banking is not the most popular topic. Much like bookkeeping and accounting, the structured and mathematical background of the subject is not for everyone. The principles of the annuity loan and the correct calculation of the compound interest effects are indispensable as a qualification in studies or professional training.

As in many areas of life, this theoretical basis is insufficient to understand lending in practice. For example, each credit institution proceeds on the basis of individual experiences in order to assess the creditworthiness of a potential borrower. For private customers, the Schufa entry is an important clue that is weighted differently depending on the lender. Nowadays, some financial partners even completely dispense with the influence of the Schufa score when determining the repayment terms.

For a company loan, practical experience in lending is even more important, as there is no Schufa entry for creditworthiness. It is all the more important to read operational key figures correctly and to make a wise forecast for a secure repayment of the loan. In addition to technical know-how, the right instinct is required here. When entering the industry it takes months to years to properly evaluate well-founded loan inquiries from companies. A basic understanding of interest calculation helps here, the actual credit calculation is still exclusively computer-based nowadays.

Understand loan financing options

Not all credit is created equal. In the private sector in particular, there are significant differences, depending on the preferences in repayment and the type of investment to be financed. Long credit periods of 20 to 30 years are not uncommon for mortgage lending and are implemented in practice via follow-up financing. In theory, credit financing over three decades could be calculated, but this does not include any
Mortgage lenders in this form. The uncertainties in interest rate developments are simply too great for this.

The same applies if private borrowers want to safely master a debt restructuring. The theory of loan financing is based on a neatly executed loan agreement, which in practice often does not exist. Many borrowers also look to the option of a free special repayment, ideally in full. This makes it possible to switch to a lender that is now cheaper in order to trigger the first loan in full - the so-called rescheduling. A loan that has been granted should always take this contingency into account from a financial mathematical point of view so that the lender does not suffer a financial disadvantage at any point in time.

Gain practical insights into lending

Ideally, business economists gain first-hand experience with lending. Perhaps they have to finance a small purchase with credit during their apprenticeship. The analysis of the credit market shows how diverse the conditions and contractual content of the individual providers are. Of course, nobody has to go into debt to get to know the practical side of a loan. Simulating such a situation still provides a valuable basis for in-depth practical knowledge. For example, a financial calculator on the Internet can be used to check which factors banks and credit institutions pay attention to when making the award.

The same applies to the assessment of one's own creditworthiness and its influence on the interest rate. Whenever such a simulation is run, it should be run anonymously. Otherwise, the research will affect actual lending in later months or years. If a loan is not granted anonymously, this is noted in a network available to all banks. In retrospect, this gives the impression that a loan was requested, but it never came about. This, too, is a decision factor that cannot be derived from the pure theory of lending.

Use advisory services if you lack practical knowledge

If there is a great deal of interest in the practical side of lending, the insight is also possible without simulation and loan comparison. Various independent institutions advise on all aspects of credit and pave the way for a secure deal with extensive specialist knowledge. The help of the consumer advice centers is a practical step to differentiate a serious from a dubious calculation.