Economically, financing often only makes sense if the money is invested profitably, i.e. the borrowing costs are lower than the return on the investment. But even if this is the plan, credit customers are repeatedly lured into financing traps. Then loan termination and destruction of existence are just around the corner.
Case 1: Lack of matching maturities
Those who take out a loan to purchase business equipment often realize too late that they are still paying off their loan, even though their investment would no longer yield what is needed to pay off the remaining debt if they were to sell it spontaneously. The acquisition of a replacement investment then leads to the accumulation of debt.
2. trap: follow-up financing risk
The situation is similar for real estate owners who have fixed their loan term at, say, ten years – but the money from a repayment vehicle (such as a life insurance policy) is only available after twelve years, i.e. two years later: The two-year time difference can be exploited by the bank to enforce almost usurious interest rates. This is especially true if the equity invested and the loan repayments have been so low so far that no other bank is willing to participate in a debt restructuring. The lower the equity capital, the more important it is to have legally secure agreements with the credit institution so that the follow-up financing can be obtained later at the usual market conditions.
3. trap: arrears, missing, incorrect or manipulated documents on creditworthiness
Termination without notice is provoked by the customer if interest and redemption payments due are not made, if documents for assessing creditworthiness are not submitted or are submitted in a manipulated form, or if creditworthiness has objectively deteriorated. Indications for this can be enforcement measures or the repeated exceeding of agreed limits.
4. trap: tolerated overdraft
No bank is obliged to accept constant overdrafts if it has repeatedly issued warnings. The case is different if the overdrawing has been repeatedly accepted without objection. Then a surprise loan termination comes �at an inopportune moment�, and puts the bank in jail for intentional immoral damage.
5. trap: under- and overcollateralisation
Banks can revalue loan collateral at any time; any undercollateralisation that then arises prepares the loan for termination. This right is also available to banks that have previously worked fraudulently with investment brokers or junk real estate agents. In this respect, the credit customer is well advised to have the value of his investments and capital assets checked in advance for his own account – and to stipulate the valuation standards objectively in the credit agreement. If the bank has more than 120 percent of the assets as collateral, it is obliged to release them: However, this must also be regulated in the contract, because otherwise the bank can choose which collateral it wants to waive first.
6. trap: fixed loan with life insurance for redemption
It is not only since the financial crisis that some bankers have been blackmailing customers by saying that they will only get a loan if they also take out a life insurance policy at the same time. This commission maximization model is not only often disadvantageous from a tax point of view. An expert opinion will be able to prove the financial loss for which the credit institution will then be directly liable. Annuity loans are always cheaper and paid off faster. But the customer was often deceived about this by unrealistic sample calculations of the insurer: only on paper would the loan actually have been repaid by the maturity benefit of the life insurance. In reality today, however, the borrower finds that he is left with a substantial residual debt after offsetting it against the maturity benefit of the life insurance policy.
7. trap: house bank without alternatives
It’s not just a good rule of thumb with investments to spread your risk. In the case of credit financing, it is also advisable to maintain a connection with at least two other banks – ideally these should be located in two different countries. If a dispute arises with an institution, it is at least possible to maintain solvency and thus avoid the often certain insolvency.
Case 8: Intervention by the Bank in the management of the company
Banks often impose their own management consultants on commercial loan customers. The owners or managers then mutate into the �straw man of the bank�. What appears to be well-intentioned sometimes only turns out to be a measure to obtain further loan collateral or to be preferred over other creditors as a bank. It is better for entrepreneurs themselves to carry out regular internal and external monitoring of their business relationships. A qualified in-house tax advisor or auditor can help to identify and restructure uneconomic business areas.
9. trap: �shark bites� for banks and related parties
Time and again it can be observed that persons from the bank’s board of directors or supervisory board already know who could take over the assets available with a loan customer. �Good friends� are sometimes informed in advance and put in place – even before a loan notice has been issued. Such indiscretions violate banking secrecy and data protection. Such collusive �booty-sharing� can often only be countered by strategic loan contract design.
10th trap: locusts and collection agencies
Major banks and savings banks have demolished their reputations with larger traders by passing on credit claims to hedge funds and �Moscow collections�. Neither the courts nor the legislature offer any protection here for the self-employed, especially commercial businesses. Occasionally, the customer advisor then regrets that a million-dollar loan had to be cancelled without real need in order to sell it on to a grasshopper. Rarely does the comment come: �Yes, we know that this was illegal – but at best your heirs will be able to experience the end of a lawsuit.�
Dr. Johannes Fiala Peter A. Schramm
(bbr 01-02/2010, 58-59)
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About the author
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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