The most important facts about the overdraft facility

by Admin | July 1, 2021
The most important facts about the overdraft facility

If you run out of money in your checking account before the end of the month, the overdraft facility often comes into play. Thanks to it, you can still withdraw cash from ATMs, make transfers or pay with your EC card, even though your balance has already been used up at that point.

Just under half of American consumers use overdraft facilities more or less regularly. For example, at the turn of the year, when expensive Christmas presents and insurance premiums due cause the account to slip into the red. Summer vacations or unforeseen expenses are other common reasons.

But how does an overdraft facility actually work, when does it make sense and what worthwhile alternatives are there?

What is an overdraft facility?

The overdraft facility is an overdraft facility for the checking account. The bank grants the consumer the possibility to spend more money than is actually in the account (hence the term "granted overdraft").

However, this is only possible up to a certain amount. The bank determines the maximum limit up to which you may overdraw your account. The amount depends mainly on your creditworthiness and the amount of regular income you receive on your current account.

Example: The bank grants you an overdraft facility of 1,500 dollars. This means that you can dispose of a total of 2,500 dollars with an account balance of 1,000 dollars.

When is an overdraft facility worthwhile?

The overdraft facility provides the consumer with a quick and uncomplicated way to regain room for maneuver in the event of a financial bottleneck. This allows him to remain solvent. He can use the money freely. Repayment is made with each deposit, so that the next monthly salary, for example, offsets the use of the overdraft facility.

However, this flexibility comes at a price. At an average of just over 9 percent, overdraft facility interest rates are significantly more expensive than other forms of credit. Therefore, the overdraft facility should only be used temporarily to cover cash requirements.

In the following situations, the use of the overdraft facility can be useful:

An overdraft facility is worthwhile in the case of unplanned high expenses

It makes sense to use the overdraft for unforeseen but necessary expenses that exceed your available monthly budget. Typical examples include buying a new washing machine, medical therapy or car repairs.

An overdraft is worthwhile for forgotten bills

You have simply forgotten that another bill, direct debit or standing order is debited? Here, too, the overdraft facility helps as a short-term payment bridge. It is often cheaper to accept the overdraft interest than to pay reminder fees or risk a Schufa entry.

An overdraft facility is worthwhile with high price discounts

If you use the Dispo for a bargain, you should first weigh the costs: Is the cost discount on the special offer greater than the cost of the overdraft facility interest you will have to pay?

An overdraft facility is worthwhile as a hedge against emergencies

You have locked yourself out and the locksmith demands immediate payment in cash? Or if you fall ill while on vacation abroad, you have to pay the local medical costs yourself first? In such cases, the overdraft facility will help you out of a tight spot if your account does not have sufficient funds.

As a rule, you should only use the overdraft facility to the extent that you can soon pay off the overdraft again and easily cover your living expenses from your own funds in the next month.


How does an overdraft facility work?

With an overdraft facility, you have a credit line that you can use, but don't have to. The overdraft facility is granted by the bank once and in a certain amount. After that, you can use the overdraft facility at any time up to the agreed maximum amount without having to apply for credit.

The overdraft facility is not tied to a specific purpose. It therefore does not matter what you spend the money on.

Each time you spend it, the credit volume that can still be drawn down is reduced and your account falls even further into the red. The overdraft will only be reduced and finally cleared when money starts coming into your account again. Afterwards, the full credit limit is available to you again. You pay interest as long as you are in the negative - but only for the amount you draw down.

This is how the repayment of the overdraft works

You do not have to keep to a fixed date or fixed installments to repay the overdraft facility. You can repay the credit in any period of time, whereby "repay" is synonymous with "balance current account". This is how the negative balance

Copyright © 2023