Wednesday, February 20, 2013

Thoughts on taking a personal bank loan in Germany and investing in India

Thoughts on taking a bank loan in Germany and Investing in India

This article has been written as majority of our readers are Indians. If you are employed in Germany and if you have a bank account in India (NRI or local bank account) then the following article may be of interest for you. The purpose of this article is to invite comments from our readers based on their experience.

In Germany, one can avail personal bank loan for interest rate as low as 3.5% per annum (effective rate). Please note that the rate of interest depends on loan tenure and loan amount and vary from bank to bank for same tenure and amount.

In India, banks usually pay 4% interest per annum on your savings. Moreover, if you make term deposits or so called fixed deposits, you can get interest as high as 9% per annum in India. Of course, depending on your account type in India, you may incur tax on the interest amount that is earned in India (as interest earned on your principal amount is considered as income)

Can we turn this scenario for our advantage. I personally believe, Yes. Take a loan in Germany and pay approximately 4% interest per annum and invest this loan in India in fixed deposits to get approximately 9% interest per annum (minus tax deductions on the earned interest).  (click read more below to continue reading)

An example (based on the interest rate of Targo Bank, Germany):
1. Taking Loan in Germany:
Loan amount: 3000 Euros
Tenure: 12 months
Amount to pay per month: approximately 255€ (see the loan calculator here)
Total amount paid back in 12 months to the bank = 12 months * 255.31€ = 3064 Euros
Total interest paid to the bank in 12 months = 3064 - 3000 (loan amount) = 64€

2. Investing the Loan in India (as Fixed deposit):
3000 Euros (loan taken in Germany) is equivalent to more than 200000 INR (Indian Rupees) as per today's exchange rate
Banks in India are giving between 8% and 9% interest on your fixed deposits for a 1 year tenure. Assuming 8.5% as fixed deposit interest, then for 200000 INR, interest earned is around 17000 INR (~239 Euros). Tax on interest is approximately 3400 INR (around 20%, check this). So money earned (after tax deduction) is 13600 INR which is equivalent to ~191 Euros. Deducting 64€ paid to the bank in Germany as interest rate, net profit is ~117 Euros. Please note that if you have NRI account (NRE savings account, you may not incur taxes on your earned interest) which means your net gain is ~239 Euros.

Of course, the currency exchange rate plays a big role in deciding the profit/loss factor. In the above example, the exchange rate is assumed to be more or less equal (1 Euro = 71 INR) for the entire year. But usually this is not the case. After taking the loan and investing in India, if the rupee falls (say, 1 Euro = 72 INR), then the net profit will go down.  Lets say, today's exchange rate is X (i.e 1 Euro = X INR, at the time of availing loan). If the average exchange rate for a year is X+3, then net profit will go down and may lead to loss. If the average exchange rate for a year is X, the above example calculation of net profit holds good. If the average exchange rate for a year is X-3, then you will receive more profit than shown in the above example calculation

Loan Calculators and steps to get a Loan in Germany
Following links takes you to loan calculators of various banks to aid you in calculating the interest rate based on loan amount and tenure

Bank Loan Calculator/
Loan Application
Targo Bank Kredit
DKB Kredit
Noris Bank Kredit
Postbank Kredit
Volkswagen Bank
Creditplus Bank (works in IE)
Barclaycard Kredit

How to get a loan via online :
1. Select a bank from above loan calculators. Enter the required loan amount, tenure to find the monthly installment to pay.
2. If you are satisfied with the interest rate and the monthly payment, continue with the online appication form for loan
3. Enter all the details in the online form and complete the application
4. At the end you can generate a PDF of the application form
5. Sign this form and along with the photocopies of requested documents, post it to the bank

Disclaimer: Please note that this article has been written for information purpose only and to invite feedback from our readers based on their experience. Each individual must weigh the pros and cons of the approach described above. We do not guarantee profit and we are not financial consultants :)


  1. I got feedback for this post in Indians in Germany yahoo group.In addition to FD, one can expand the portfolio by investing in Property, Gold. Readers also pointed out to consider inflation and the value of the currency in the future.

  2. Comment received in Yahoo group (indians in germany), reposting it here:

    Thanks for the nice article!
    I usually recommend my friends to take this private loan in Germany to buy properties in India.
    For e.g. if you want to take a home loan in India for Rs. 40 lakhs the interest rate is roughly around 11%. Instead, apply for Rs. 30 lakhs home loan in India and take 15.000 € (or more based on eligibility) private loan here for approx 4.5% interest. If your financial situation supports it, aim for a shorter tenure - max 24 months. In this case, you also have the satisfaction of prepaying the principal of 10 lakhs within 2 years. After the 2 years, go for another 15.000 € and make a prepayment of your outstanding home loan principal - the tenure will fall drastically (for e.g. from 15 years to like 7 years).

    For FDs, remember that if it is an NRO FD, and if you do not submit some specific form (something like Double Taxation avoidance form) to your Indian bank, then the tax in 30%. This form must be filled by you and signed by Indian Consulate in Germany. I don't know if such an approval from Consulate is based on our incomes here i..e if you only earn less than a certain amount, you can avail this benefit. Otherwise, it is going to be 30% tax.

    Another method is to send the money to your parents/in-laws and open FD in their name. They being senior citizens, the interest rate is little higher and also the tax is much less. Ofcourse, if they have too much money in FD, there might be complications and questions about the source. So, this technique might be good for smaller amounts.

  3. Comment received in Yahoo group (indians in germany), reposting it here:

    AFAIK, in cost management there is a concept called as NPV (Net Present Value). You can actually establish the value of your money in the future based on present cost out-flow and future cost in-flow.

    So, even if you feel that in India the FD rate is 9% and the German Loan interest is 4%, you should also consider the Inflation rate in both countries. In India, the inflation is always very high about 7 to 8% while in Germany it is just 1.7%
    Hence, over the period you keep the money in Indian FD, the value is nothing at the end of the FD maturity.

    By numbers, for Indian FD:
    Example for Rs.100 for 1 year you get Rs.109 (9% interest), but at maturity the value of Rs.109 is actually Rs.100.28 (assuming Inflation of 8%) plus income tax if interest is above certain range.

    Inflation rate Link:

    My Investment advice:
    Invest in Indian property (land is better than apartment in terms of profit margin, but apartment is easier to dispose)
    Invest in Gold, it will best option.
    Wait for the right time to transfer money to India to get best exchange rate
    Put some amount of the money in FD so that you can maintain some capital for liquidity and also for purchases of land in the future.
    Stay away from Stock markets if cannot devote time to track each of your stocks everyday and every minute.


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