The overdraft facilities are used for the short-term financing of investments and offer a flexible credit line at favorable interest rates. Definition & significance of the current account overdraft The current account credit differs significantly from other loans and is also referred to as overdraft facilities or overdraft facilities. However, with current account credit, the situation is very different as it sees a completely different procedure. A bank overdraft is always linked to a current account and includes a current account credit for that account. Bank customers now have the option of claiming the current account balance at any time.
It is possible to use the current account balance
A current account credit offers the greatest possible freedom not only in the draw, but also in the repayment. This frees the bank client when and how he wants to repay his current account. Thus, such a current account credit line can be paid back in full or in part at any time. The financial markets are characterized by great heterogeneity in many areas, including overdrafts.
The current account overdraft is the most common form of current account for individuals, for most people it is the extract from the overdraft. Of course, private individuals are not the only bank customers who can avail themselves of a current account credit. Corporate customers of a bank can be overdrawn their current account also in the course of a current account credit.
However, in this case it is not spoken of a current account credit, but of a working loan. Whether a current account loan is a bank overdraft facility or an operating loan, it always serves the same purpose. If, for example, the salary transfer or the pension payment is delayed, the current account credit ensures that all fixed costs can be paid as usual without delay.
A bank overdraft is also very useful for the companies, as they can meet their salary payment dates without any problems, even if the last revenue has not yet been credited to the player’s account. Therefore, such a working loan is often the only possible solution to deal with short-term liquidity bottlenecks.
How a Current Account Loan Works – Before
In the past, the term “current account credit” applied to what is today referred to as disposition for private individuals and working capital loans for businesses. The name results from the current account. The overdraft facility is a classic overdraft facility. Unlike a normal balance, the corresponding amount is not posted to a special account, but the house bank allows the unproblematic overdraft, if you can count on regular cash.
The current account credit volume will thus be used for long-term financing. The characteristics of this loan are to be distinguished between private account holders and companies. As a rule, the private person receives the disposition informally, depending on his monthly income. This is set up for private households only if there are special features, such as the amount of the loan or possible collateral.
Due to the lack of a loan agreement, the principal bank can terminate the current account credit line in whole or in part with a specific deadline. The situation is different with a current account credit, which is larger and more extensive. Basically, this type of overdraft requires a loan agreement and the granting of a mortgage by the contractor.
Why is overdraft so expensive?
Repeatedly, the bank gets caught in the crossfire and is criticized by consumer advocates. They complain that interest rates on overdrafts are set too high. However, the following should also be taken into consideration when calculating interest: Current account overdrafts are not fixed loans but offer the opportunity to exceed the current account in the short term.
For the banks, that means that they have to provide enough liquid funds around the clock, so that each account holder of an account with a current account credit can fully exploit them at all times. However, overdraft crediting for credit institutions constitutes a credit option that reduces their liquidity situation and thus the associated COO burden. Only the interest that was used as an overdraft on the account will be charged.
In most cases, the client will be billed at the end of the month. In most cases, the customer pays interest at the end of the respective trimester. For example, suppose an individual uses a disposition of $ 5,000 over a one-year period. The price for this current account credit therefore expires at 600 EUR. The interest expenses as of March 2017 amount to around EUR 60 with a remaining term of one year.
At the end of the year, the debit balance of EUR 5,000 is still open in the planning run. If the overdrafts were deducted during the year, the interest rate would be 331 EUR, which is five times that amount. As an alternative to current account credit, ie the sale of receivables, companies can use factoring.
The possibilities for overdrafts are shown in the following table: What options are there? The reason for this is the interest amount, which is the lowest for a installment loan. If it comes at all to the car financing, the automobile buyer saves again with a special car loan. About two years ago, the German government asked banks to make more cost-effective offers to their consumers with a permanent overdraft facility.
The customer receives from the house bank a credit line on a sub-account. In contrast to the disposition business, there is a loan agreement for this. As with overdrafts, interest is only on the amounts claimed by the account holder. The interest rate on a framework loan is between the interest rate on a installment loan and that on an overdraft.
However, unlike credit institutions, people with a weak creditworthiness have the opportunity to get a loan. Private lending is not only possible for individuals.