Almost everyone has it, and many also use it: the overdraft facility. A sition loan – which is also called overdraft facility or overdraft facility – gives you the option of debiting your checking account in addition to your credit balance. It is usually made available to you as a current account credit with a continuously approved overdraft. Your credit line for a overdraft facility is limited and usually depends on the amount of your regular salary receipts.
Unpredictable expenses in particular are often paid for with the overdraft facility. This is particularly due to the uncomplicated processing: Without signing a contract and possibly exposing yourself to unpleasant questions from the bank about your own finances, you can borrow money quickly.
But is that really always the best solution? Those who are unsure should ask themselves what is more important to them: The flexibility to have a credit line available at all times? Or to pay the lowest possible cost for the loan?
Overdraft facility: Flexible, but expensive
You must arrange a credit line with your bank. As a rule, this is done relatively quickly and easily. The amount of your is based on your account movements, whereby the salary receipts are decisive. The bank will tell you which maximum overdraft facility it can set up for you and you decide whether you want to use it up or lower it.
Banks and savings banks generally charge a significantly higher annual percentage rate for an approved overdraft facility than for an installment loan. According to magazine, the average overdraft interest rate in April 2018 was almost ten percent. The price ranges at the individual banks vary widely, and customers sometimes have to pay up to 14 percent overdraft interest. Under certain conditions, other banks charge little or no interest for the use of the overdraft facility. A comparison is therefore important and saves you high costs in an emergency.
In addition to the overdraft interest, overdraft interest lurks. These apply if you either have not set up a credit facility and still overdraw your account, or if you overdraw your overdraft facility beyond the agreed credit line. And then it gets really expensive: the magazine found overdraft interest of up to 19 percent among the banks examined. In addition, interest rates can change at any time – for example in the event of general interest rate increases. The rule here is: the longer your loan runs, the greater your risk of paying higher interest.
Beware of the overdraft trap
With an approved overdraft facility, you can use the specified loan amount from your checking account. Your credit will be reduced by new incoming payments or increased by further expenses. You will only be charged interest on the loan amount that you actually use. With frequent money movements, this can quickly become confusing for you. There is no fixed repayment agreement.
Many users therefore find it difficult to manage their account completely in the green again. A rule of thumb is that you need twice the amount with which you use the overdraft facility in order to be able to be positive again in the long term. This means that if you overdraw your account by 400 dollars, you need 800 dollars so that you don’t get into the overdraft facility again. If you ignore this, you can quickly get into an evil downward spiral. Because you may fall back into the overdraft facility over and over again because the money always remains scarce at the end of the month. If you should notice that you are no longer out of the overdraft facility, we strongly recommend that you contact your bank. It will help you escape the eternal minus.
We would advise you for your financial security, if only to arrange a small overdraft facility with your bank. If salary payments and, for example, the deduction of an insurance premium overlap once at the end of the month, the overdraft facility may be a good, short-term solution to avoid chargebacks. However, this solution should never be used permanently.
Alternative: installment loan instead of overdraft facility
The overdraft facility is not suitable for planned purchases such as new furniture or a new car. An installment loan is often the cheaper alternative for you compared to an overdraft facility. Among other things, this is because the bank knows exactly when you pay which installments and when the loan is fully paid off with an installment loan through the repayment plan. The bank does not know about the overdraft facility. It is triggered when it is triggered. There is no installment agreement or the like. The risk of a payment default is therefore lower for the bank with an installment loan with a repayment plan, and the bank rewards this with low interest rates.