The overdraft facility, or overdraft facility for short, is a line of credit that is set up in private checking accounts. It can be used individually, and repayment is also very flexible. For this reason, the overdraft facility is one of the most common loans.
line of credit
Overdraft facility is not a credit in the strict sense, because the loan is not paid out in one amount after application. Rather, the account holder of a private checking account receives the right to overdraw his account up to the amount of the overdraft facility. It is therefore a credit line that can be drawn on as desired.
Setup of the disposable
In many cases, the overdraft facility is set up when the account is opened. A separate application is not necessary at most banks, provided the account holder can prove monthly salary income and positive Credit Bureau information. For this purpose, the salary statements should be submitted to the bank.
If there are no proof of salary, some institutes wait for the first salary receipt before approval, before the overdraft facility is set up.
The amount of the overdraft facility is based on the amount of the monthly net income that goes into the account. In most cases, banks set up double or triple net salaries. Later changes are of course possible at any time on request. In the case of desired increases, however, a correspondingly positive credit rating must be demonstrated.
Legal basis for the overdraft facility
Overdraft facility is a form of open-ended overdraft facility. It is therefore a loan within the meaning of Sections 488 ff. BGB and Section 493 BGB. On the basis of these legal requirements, the overdraft facility is classified as a consumer credit agreement. The prerequisite for this, however, is that the banks do not charge any further costs apart from the calculated interest. In addition, the interest may not be calculated in periods shorter than three months.
Contractual basis of the overdraft facility
In contrast to classic installment loans, users of the overdraft facility do not receive a loan contract. Nevertheless, the credit institution is obliged to inform the borrower about the most important key data of the loan.
- Credit line amount
- the current APR
- Regulations for contract termination
Since the loan interest is always variably agreed, the banks must also inform them when and under what conditions changes can take place. The information mentioned is usually brought to the attention of customers via printouts on the account statement.
Disposable credit options
The overdraft facility can be used flexibly because it is a credit line. Dispositions are possible by direct debit as well as by bank transfer and cash withdrawal. If you wish, you can use the overdraft facility to finance the purchase of a new television, but you can also use this credit line to pay for your holiday trip without any problems.
When using the overdraft facility, no further application to the bank is necessary as long as it is within the approved credit line.
Repayment of the overdraft facility
No fixed repayment plan is agreed for the overdraft facility. Rather, borrowers are able to repay the loan flexibly, for example through salary payments. This of course also gives you the option of repaying the loan in whole or in part at any time, without observing notice periods.
And since we speak of a revolving credit in the overdraft facility, the credit line can be used again and again after it has been repaid.
Cancellation by the account holder
If the overdraft facility is no longer to be used, account holders can ask their bank at any time to delete the overdraft facility on the account. Such cancellation is possible without notice, so that the overdraft or rescheduling of a overdraft facility can be carried out at any time.
If the overdraft facility is canceled, the amount of the loan is immediately due and must be repaid.
The bank terminates the overdraft facility
But not only the account holder, the bank also has the right to terminate the overdraft facility. Such termination can be given, for example, if the account holder does not keep to agreements and uses the account far beyond the overdraft facility. However, even if negative creditworthiness characteristics become known, for example through entry in the Credit Bureau data, the overdraft facility can be terminated.
However, such termination is not carried out immediately. Rather, account holders have 21 days after pronounced termination to seek rescheduling or to convince the bank to maintain the loan.
Account attachment procedure
As part of an account attachment, creditors can block existing account balances and have them transferred. The overdraft facility, on the other hand, cannot be attached because it is also a loan, which in turn is viewed as a claim.
If an account is seized, the bank will terminate the overdraft facility in order to keep the account solely in the credit. After all, the risk of default is very high in these cases.
Overdraft facility costs
As with any loan, there are costs associated with the overdraft facility. Processing fees or fees for the submission of the loan are generally not charged, only interest costs must be borne by the overdraft facility.
However, this interest only applies to the amount of the loan used, and interest is only calculated for those days in which the account was held in the debit. The interest calculation for the overdraft facility is therefore fair, transparent and understandable.
In the case of overdraft facilities, a variable interest rate is generally agreed. For account holders, this means that the bank will adjust rates both up and down. Especially in times of rising market interest rates, the bank will also adjust interest rates on the overdraft facility, without asking the customer.
Changes to the overdraft facility can be seen on the price display, in many cases the banks inform their customers of this in advance by means of an account statement.
High interest rates on overdrafts
The overdraft facility is one of the most expensive loans in Germany. The reason for this is that the banks have to keep the loan amounts at hand, because they could be used.
The terms of the institutes vary between 7.9 – 16% pa effective. Due to these high interest rates, it often makes sense to return the overdraft facility to a classic personal loan at a monthly rate. Not only can this save interest, but the loan can also be repaid with monthly installments, so that borrowers will soon be debt-free.
Debt rescheduling into an installment loan
The debt rescheduling from an overdraft facility to an installment loan makes sense in many cases due to the high interest rates. Notice periods do not have to be taken into account with the overdraft facility, the repayment is made simply by transferring the open account balance.
The interest on the new installment loan can show whether a debt rescheduling makes sense. However, the costs incurred, such as processing fees, should also be taken into account. The APR shows the cost of the new installment loan, which can be compared to the overdraft facility.
When it makes sense to use overdraft facility – only for short financing
The overdraft facility is particularly useful as a line of credit for short-term money requirements. For example, if an important invoice is to be paid shortly before receipt of wages or if the holiday trip has to be transferred right now, the overdraft facility is suitable because it can be repaid at any time.
However, due to the comparatively high interest rates, it is usually not worthwhile for long-term financing. In these cases, an installment loan would be the better option.
Beware of over-indebtedness
In some cases, the overdraft facility is the first way to overindebtedness. Some account holders always use the overdraft facility up to its upper limit and then have to pay a corresponding amount of interest.
If the income then falls, there is a risk of over-indebtedness because funds have not been put back. Therefore, the overdraft facility should only be used in an emergency if possible, and installment loans are available for long-term financing.