Debt rescheduling – alternatives to expensive overdrafts

It happened quickly. An unforeseen issue is pending for which the current account is no longer sufficient. In this case, the overdraft facility granted by the bank is usually used. However, before you use the overdraft facility, you should be aware of whether this is the best way to avoid unnecessarily burdening your wallet.

When is it advisable to use a credit facility?

When is it advisable to use a credit facility?

The overdraft facility is to be seen as a short-term loan granted by the bank, the amount of which is variable – up to the prescribed limit. However, the credit institution usually also pays for this service with high interest rates. The nationwide

  • Average overdraft rates are a little under 10%, but peak at just under 14% (see overdraft rates: 1,377 banks in the test – Stiftung Warentest)

Therefore, you should urgently inquire about the interest rate policy of your house bank before you decide to overdraw your account.

In the event of a short-term shortage of liquidity, it is advisable to use the overdraft facility. If the account can be quickly settled, the interest to be paid is still a nuisance, but has to be compensated for and tolerated by the average private household.

When is it better to use an installment loan or a call-off loan as an overdraft alternative?

When is it better to use an installment loan or a call-off loan as an overdraft alternative?

In general, you should think about an installment loan or call credit if you know for sure that the overdrafting of the current account cannot be compensated for in a short time. Installment loans and call credits are granted at an average annual interest rate of 6 to 7%, depending on the term and amount of the loan, and are usually available from a minimum amount of USD 2,500.

If you now compare the interest-rate differences between the overdraft facility and the installment loan, or on-demand loan, you should also consider that the form of the installment loan is usually associated with a minimum term of 12 months. Optionally, the call credit can also be repaid unscheduled, but this option can also be remunerated by the bank with an additional interest surcharge of up to 5%.

Comparison of disposition loan and installment loan

Comparison of disposition loan and installment loan

If one assumes that the overdraft facility with an average interest rate of approx. 12% is twice as expensive as the installment loan with approx. 6%, the following conclusion is reached:

The overdraft facility has a lower interest charge than the installment loan if it can be repaid in less than half the desired minimum term of the installment loan. Of course, the compound interest effect (additional interest on accrued loan interest) of the overdraft facility must also be taken into account negatively and the faster the overdrawn account is settled, the greater the savings in interest costs.

The overdraft facility has an increased interest charge compared to the installment loan if it cannot be repaid in less than half the desired minimum term of the installment loan.

Of course, an individual decision is largely dependent on personal factors and income relationships.

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