Conclusion of contract
Photo: wera Rodsawang / Getty Images
Progress is sometimes a snail. Last week the Bundestag decided that in future customers will have to pay significantly less commission when taking out residual debt insurance. This sometimes kicks in when customers can no longer pay a loan installment. In fact, this insurance is mostly nonsensical and should hardly be sold at all. The MPs could have achieved that with clever rules. Now, as a consumer, you have to help yourself.
Residual debt insurance - sold together with the installment loan for the kitchen or car - has been a nuisance for many consumers for two decades.
Because such insurance often doubles the cost of the installment loan.
The major part of these costs goes on for commissions for brokering the insurance.
This is up to 70 percent, as the financial supervisory authority Bafin determined a few years ago.
How nonsensical this business is for consumers can easily be illustrated by a single case.
A Bavarian tax officer in a financial squeeze had been sold a residual debt insurance from the car dealer when he bought his car - to protect against unemployment (for the civil servant!).
The unnecessary cost for the poor man: 1817 euros.
The comparison of interest rates and insurance premiums for a EUR 10,000 installment loan is also impressive.
The insurance is usually more expensive than the interest.
How seldom the insurance actually comes into play has just been confirmed by the FDP opposition faction in a small request from the federal government: Only 0.2 percent of all insurance contracts were paid at all.
How high this is is not known.
Consumer advice centers, which have come together in an »alliance against usury«, regularly report very horrific cases in which an oversized installment loan, together with the high costs of unnecessary residual debt insurance, has ruined consumers.
An earlier tightening of the law was of little use: since February 2018, the bank has had to instruct consumers one week after taking out the insurance that they can also revoke the residual debt insurance if they do not want it.
That did not help much.
The Bafin was only able to determine a slight increase in the revocation rate in the following year.
The new law
Now the grand coalition has decided that from July 2022 the commissions for banks that broker residual debt insurance will be capped at 2.5 percent of the loan amount.
That means: A residual debt insurance, which protects a loan of 10,000 euros, may not cost customers more than 250 euros extra in agency fee in the future.
Up to now, the usual amount was 500 euros, and a commission of 1000 euros also occasionally occurred.
The new regulation is intended to prevent residual debt insurance from banks and car dealers from being sold - as before - primarily in order to collect fat commissions.
The finding is really not new, but at least it is government official now.
The trouble with residual debt insurance has actually been known for more than a dozen years.
Some banks have stayed away from the product for a long time.
ING stopped selling years ago.
With sensible credit calculators, banks that offer such insurance in advance as part of the credit package are delisted.
The British solution
The new law should at least make this useless business more difficult.
Unfortunately not until summer 2022. Much easier than the detour via the capped commissions would have been the bone-dry British variant of regulation:
In Great Britain, the Financial Conduct Authority has ruled that residual debt insurance cannot be sold until at least one week after the loan agreement has been signed - so that the customer does not get the impression that the loan would not exist without insurance.
If the seller gives the impression that such an insurance will make the loan cheaper, the contract is immediately void.
In addition, contracts are prohibited in the UK where the customer could not obtain relevant insurance coverage.
The sale of such contracts to students or retirees is deemed to be misuse.
The sale of a residual debt insurance against unemployment to a civil servant would certainly not have been permitted there.
And it is not just such abuse that the British authorities have banned.
She also ordered the reversal of these illegal contracts.
UK consumers have reimbursed more than £ 38 billion in payment protection payments from their banks and insurance companies over the past decade.
Most recently, around 90 percent of the relevant customer complaints were granted.
The billions in reimbursement are more than the UK's major banks have made in profits over the past decade.
What you can do yourself
After reading this, you will normally no longer take out a new residual debt insurance when buying your next used car or when financing the kitchen.
But what about your possible old contracts?
There is also a remedy:
If you have just taken out residual debt insurance, for example when buying a new electric car, you can usually revoke it for 30 days. The withdrawal period does not begin until you have been instructed in writing about your right of withdrawal and have received the product information sheet with all details about the insurance. A sample letter for revocation can be found here.
Sometimes you can get rid of the contract along with the loan. A withdrawal period also applies to such loans. And the rule here also applies that the bank must have properly informed you about the product and the cancellation options. Often enough, the banks have not done that. The consumer center in Hamburg will check for you whether you have a chance to withdraw your consent. However, that costs a hundred. And you need to be able to repay the loan in one fell swoop. And sometimes you don't get the full insurance premium back.
You can redeem an installment loan at any time if, for example, you are offered a cheaper loan from another bank.
Then you have a special right of termination for the residual debt insurance and receive at least part of the insurance premium back.
It is possible that the insurance will deduct something because you allegedly enjoyed insurance cover.
It will still be worth it.
You can quickly save a four-digit sum on insurance and interest.
That's how easy it is.
Perhaps the current reorganization of the German financial regulator Bafin will help in the end.
She has known about the misuse of this insurance product for years and has informed the public about it several times.
However, it did not stop this abuse until the law was passed last week.
So there is more to it than that. The Bafin Insurance Advisory Board will hold its annual meeting next week. Count me in.