The rising cost of living is driving more and more people into the cost trap. According to surveys, around one in seven people in Germany currently overdraws their account more or less regularly – and the trend is rising. This becomes particularly clear during the holiday season and the months of December and January, when Christmas and annual insurance premiums fall. A financial bottleneck can be bridged with an overdraft facility (overdraft for short) granted by the bank. However, the institutes are paying dearly for this offer. (Loan) interest rates in the double-digit range are not uncommon and have continued to rise as a result of the key interest rate increases. According to Stiftung Warentest, they are currently on average twelve percent. At the end of last year it was 9.94 percent.
The overdraft facility is definitely suitable as a short-term financial buffer. As long as consumers pay off the deficit quickly, the high interest rates are not too significant. However, it is not suitable as a long-term solution because of the high overdraft fees. “It is better not to use the overdraft facility on a long-term basis in order to finance ongoing living costs,” advises Marcus Köster, lawyer and financial expert at the NRW consumer advice center.
Debt consolidation loans offer an alternative, with which consumers can reschedule an individual overdraft facility or bundle several liabilities. In the long term, these are usually cheaper than overdrafts. However, they are not always easy to get. Especially since the institutions’ procurement guidelines have become stricter due to the tense economic and geopolitical situation. “For a consumer loan, a successful credit check must be carried out before the loan is granted,” says Köster. Anyone who has often incurred debt in the past, is financially weak or has negative Schufa entries has a bad hand. And the required proof of income can also represent a major hurdle for the self-employed.
Two good alternatives to the overdraft facility are the line of credit and the installment loan. Both have different focuses and have their advantages and disadvantages. While the line of credit scores with its high level of flexibility, the installment loan is usually earmarked and is more strict with regard to the repayment modalities, but tends to be cheaper.
With a line of credit, the bank grants its customer a permanent credit line in a certain price range, which in the majority of cases is between 2,500 euros and 25,000 euros. The beneficiary can make flexible use of this framework, but does not have to. In this respect, a line of credit is well suited for borrowers who need different amounts of credit more often and over longer periods of time, such as traders or small businesses. Since interest is only due on amounts drawn down, credit lines are also suitable as a financial emergency cushion.
Unlike the overdraft, it is not a requirement to have your own checking account with the lending bank. Another advantage of credit lines: repayment can often be made flexibly – as a total amount or in partial amounts. However, borrowers should keep in mind that the interest burden is calculated retrospectively monthly or at the end of the quarter, which means they can easily lose track. In addition, the interest rates are variable and are based on a reference rate such as that of the European Central Bank for main refinancing transactions.
There is no flexible repayment option with an installment loan. Fixed monthly rates are on the agenda here. The bank also makes it available for a specific purpose. In this respect, it is particularly suitable when expensive purchases are due. As a rule, installment loans are cheaper than credit lines because they are less flexible. However, you must have your own account with the issuing bank.
If you have to live beyond your financial means for some time and need a (consumer) loan or want to refinance an expensive overdraft, you should definitely make a plan to do this as efficiently as possible. It is a good idea to determine the loan amount you need as accurately as possible and then compare different loan offers. Borrowers should not be blinded by low monthly rates, but rather pay attention to the effective annual interest rate. This is the most meaningful because it spreads almost all costs over the entire term.
Unfortunately, there is no general answer as to which of the three consumer loans is the cheapest for consumers. The same also applies to whether it makes sense to refinance an overdraft using an installment or credit line. An overdraft facility can be the better choice, especially for small amounts and very short terms. “It’s always a question of the specific individual case. To bridge a liquidity bottleneck in the short term, using the overdraft facility can be economically cheaper than the costs of an installment loan,” says Köster.
