Anyone who wants to take out a loan and is concerned with the conditions for granting a loan usually comes across the proof of income. But apart from the normal payroll accounting, what is actually regarded as such a proof of income? And why is it so important for the bank granting the loan?
Anyone who takes out a loan and reads through the generally applicable conditions for granting a loan before applying for it will come across the point of “proof of regular income” or a corresponding proof of income. But what does this mean exactly? What does proof of income actually mean for banks and financial institutions? This is a question that can be answered in just as many different ways due to the different types of credit.
While micro-loans and mini-loans may not require you to submit extensive documentation on your financial situation, the situation is different for most loans. Like credit checks, proof of income is an essential aspect for banks and credit institutions. Landlords, insurance companies, mobile phone providers and other prospective partners also inquire about your income before signing a contract. Even if this is not to your liking: without the necessary documents, many providers will refuse you services. Especially in the credit market there is often no way around sending proof of income.
Proof of income is already requested for the account and disposition
The simple reason is that banks use Agency scoring and income to assess how high the risk of default is during the repayment phase. After all, not every consumer and entrepreneur can afford every loan. Proof of income is also relevant when opening a new bank account with an integrated overdraft facility. In this case, the proven income also decides which credit line is granted by the bank managing the account.
Banks typically grant their customers an overdraft facility of two to three times their monthly net income. Self-employed or freelance account holders usually receive a credit line based on the average monthly net income. However, banks can set their own parameters for provision in this context. There is generally no guarantee for the allocation of a disposition.
Do you know exactly what banks recognise as income?
When the bank asks for proof of income, it is not a request that you comply with or not. If you refuse to send your proof, this will usually lead to rejection. In this age of modern data protection regulations, the request is not a problem. In the terms and conditions of the lenders, you will encounter notices that information will not be disclosed to third parties.
So the proof of income really only serves to analyse whether your credit request is realistic. We would now like to explain which points are important. Some consumers do not know exactly what income is counted as income. This is despite the fact that banks usually summarise very precisely which income is taken into account and which is not.
→ Recipients of national achievements such as BfG or unemployment pay I as well as persons with Hartz4 requirement are often placed before problems!
Special loans for people in problem situations
Looking for a loan as a Hartz4 recipient is not completely hopeless, as there are exceptions for the latter target groups. Under names like “Credit4”, “Studycredit” or “Credit for Unemployment ” you will find some interesting offers on the market. However, the selection is manageable and the exact amount of the payments can be decisive.
An important keyword in this context is the seizure limit. You can increase your chances with other loans if you have a co-applicant. Proof of income from a second person can mean that people with too little income can also benefit from a loan. Guarantees from people with sufficient income are also helpful. However, co-applicants and guarantors must bear in mind that you will be held liable in the event of defaults by banks.
What income is recognised as income?
The details that banks list as income on their websites and in brochures are largely identical. For example, the list of proof of income
- Income from rentals and leases
- Pension and retirement payments
- pay or salary
- income from self-employment
- Investment income
Investment income is, for example, regular dividend payments from share transactions. You should also specify fixed-interest funds (savings certificates, savings contracts, fixed-term deposit accounts).
The employment relationship is also decisive
As already mentioned, government services are not very important for banks and customers will only be able to obtain small amounts of loans. Also maintenance payments do not play a role in many banks and credit institutions. Professionals should continue to be prepared for the fact that they have to prove that they have a permanent employment contract. Applicants in the probationary period often have to expect rejection – even if the proof of income is positive.
The pension or income tax statement is sufficient proof when applying for a loan, unless you are self-employed or working on a freelance basis. You are also sometimes required to submit your bank statements and employment contracts. In addition, salary statements and/or certificates of earnings from your current employer are required. Current rental contracts help landlords to prove income when applying for a loan.
Self-employed applicants will be more obliged
Proof of income must also be submitted by the self-employed and freelancers. Tax assessment notices of the past two or three years are common practice. Depending on the activity, the bank may also want to see company balance sheets or business assessments (BAS) before making decisions. Furthermore, investors will demand annual financial statements and profit and loss statements, especially from companies as potential borrowers.
Do you run a small business or work as a freelancer? In this case, the income surplus calculation may be required. In individual cases, the requirements may result in additional costs for the involvement of a tax advisor. However, modern software allows you to make many calculations yourself.
Fast processing through digital income statements
It is not only the so-called direct banks that now allow borrowers to make a virtual application. This also includes the transmission of proof of income, which is increasingly securely encrypted via the portals of many banks. The intermediary portals are also increasingly allowing this on their platforms, so that the documents are immediately available for a whole range of credit enquiries. Above all, however, the intermediaries’ websites provide you with realistic values for the annual effective interest rates of the partner banks.
You can now even give banks digital access to your bank accounts, making income checks particularly quick. Whether this service is one step too far for you is up to you to decide. In any case, checking your income statements no longer takes a week or more. If you need money urgently, you are more likely to be convinced by the digital possibilities than borrowers who can wait relaxed and patiently for the (hopefully positive) feedback from the bank.