Private Loan Agreement in Germany [Free Download]

Key takeaways

• Lending money to a family or friend is considered a personal loan in Germany.
• If you lend the money at zero or very low interest, the German tax office considers it a gift. In this case, the borrower must pay a gift tax on the borrowed money. 
• You must pay capital gains tax on the interest earned on the private loan in Germany.

This is how you do it

• Never lend more than you can afford to lose. 
• Always sign a loan agreement when lending money to family or friends. Our sample personal loan agreement template can help you do this.
• Ask for collateral when lending large sums. You should also notarize the debt if it’s a large sum.

Table of Contents

What is a private loan agreement in Germany?

Lending money to a relative or friend is considered a private loan in Germany. Usually, you don’t draft a loan agreement when lending money to family or friends. However, it’s highly recommended that you draft one.

The loan contract you create for a private loan is called a private loan agreement.

A personal loan contract gives you the legal standing to demand your relative repay the loan. Without a contract, you can’t claim your money in court if the borrower doesn’t pay.

You can use our free personal loan agreement template when lending money to family or friends.

Do you pay tax on the interest income from personal loans in Germany?

Yes, you pay capital gains tax on the interest earned from a private loan in Germany. The capital gains tax is 25% plus a solidarity surcharge. If you are a member of the church, you also pay church tax.

Issuing a private loan at no interest in Germany

If you lend money to a friend or relative at no or very low interest, the tax office considers it a gift. In Germany, you also pay tax on gifts, which is called gift tax.

Suppose you lend 50,000€ to your friend without interest. In this case, your friend must pay gift tax on the borrowed money, as the tax office considers it a gift instead of a loan.

In Germany, there is a tax-free allowance on gift tax. The borrower doesn’t pay any tax on the tax-free allowance.

The tax-free allowance depends on the borrower’s relationship with the lender. For example, if you lend/gift to a friend, the tax-free allowance is 20,000€. On the other hand, you can lend/gift up to 400k tax-free to your children.

NOTE: Only the borrower pays gift tax in Germany. The lender doesn’t pay any gift tax.

How can you avoid gift tax?

You can avoid gift tax in two ways

• Lend less than the tax-free allowance.
• Charge an interest rate based on the market rate.

NOTE: The tax office considers the loan a gift if you agree on a very low interest rate compared to the market rate. 

What should be included in a personal loan agreement?

• Name and address of both parties
• Bank details of the lender and borrower
• Loan amount: You should think carefully before lending large amounts of money to family or friends. It can affect your relationship.
• Loan term: A fixed-term private loan agreement is recommended. In this case, the borrower must pay back the loan by the fixed date. If the personal loan contract has no fixed date, the loan must only be repaid when the loan agreement is terminated. The statutory notice period of contract termination is three months ( Section 488, Paragraph 3 of the German Civil Code ).
• Interest: Specify how often the interest is calculated and when the borrower must pay it: at the end of the year or when the loan is repaid. Be aware of gift tax when lending money interest-free.
• Repayment schedule: Should the personal loan be repaid monthly or in one go at the end of the private loan contract term? Monthly repayments reduce the default risk for you as a lender.
• Default interest: Specify the default interest rate for delayed private loan repayment. You can also consider it as a late fee.
• Early termination of personal loan agreement: Mention the scenarios when you have the right to terminate the loan contract early. For example,
  • The borrower is in arrears with at least two consecutive repayment installments or interest payments.
  • The borrower provided incorrect information that influenced the loan approval.
  • The borrower doesn’t meet its obligation to provide the agreed security within a reasonable time. 
• Security: Mention the security, such as car, real estate, etc., that the browser gave you against the loan.

Should you ask for security when issuing a private loan in Germany?

It’s recommended to ask for collateral when issuing a large loan amount. This reduces the risk of not getting the money back.

Whether the loan amount is large depends on

• your risk appetite and
• whether you can bear the loss of money.

Here are some of the security options when issuing a personal loan.

• The borrower serves their car as security.
• The borrower assigns their salary as a claim if the loan is not repaid.  
• The borrower can use real estate as collateral. In this case, you can ask the borrower to register the personal loan (mortgage) in the land register paper (Grundbuch).
• Get a notarized acknowledgment of debt with submission to enforcement (Schuldanerkenntnis mit Vollstreckungsunterwerfung). You can use this document to instruct the bailiff to recover your money if the borrower defaults. The document cost depends on the loan amount and must be borne by the borrower. It’s around 120€ for a 10,000€ loan.