An overdraft loan (popular overdraft) is often offered by a banking institution to a current account and allows the client to overdraft its account and thus pay amounts for which a bank account balance would not be sufficient.
However, overdrafts are currently also held by non-banking companies. An overdraft is also worth setting up for properly repaying clients who would otherwise often reach for quick loans.
The overdraft works on the same principle as credit cards
and allows the client to overdraft his or her account. When the account balance reaches zero, an overdraft can be used to debit money (so-called authorized overdraft).
The biggest advantage of overdraft is the increased solvency of the client. If the client gets to the account to zero, regular overdraft payments will leave the account without any complications. When the client repays the loan, he/she can resume the loan ( revolving loan).
How to set up an overdraft
An overdraft can be opened at a bank where a person already has an account or at any other bank that provides it.
To apply for an overdraft facility with a bank, it is necessary to :
- identity card
- Proof of income for the last 3 months
In order to obtain an overdraft, the applicant must be creditworthy (the ability to repay the loan). However, the application may also be rejected. If the client gets an overdraft account, he/she should know the principle of drawing an overdraft.
Overdraft rules :
- it can be used at any time and repeatedly
- the client determines the amount by which the balance can be exceeded
- the borrowed money must be paid according to the agreement 6 months to a year after the loan (but can be paid at any time during).
The overdraft has disadvantages as well as advantages. The annual overdraft interest rates range from 10% to 22% – significantly more than conventional bank loans.
There is also a fee for using the overdraft. The Client may pay a monthly flat fee, a fee for transactions made during the use of an overdraft facility or for an overdraft.
When the overdraft pays off
The overdraft is payable on repayment for a shorter period, as in this case, it pays off more than a conventional consumer loan. Consumer credit is more suitable for longer repayment. Another option is to purchase a credit card.
Unlike an overdraft loan, it has a so-called interest-free period, when the outstanding amount is not interest-bearing to the bank. The disadvantage of a credit card is the proof of the client’s creditworthiness, management fees or fees for infrequent use.
The overdraft can be canceled at any time. This is also the case when the overdraft user wants to apply for another loan. An overdraft facility can be an obstacle to obtaining another loan and so providers often insist on its cancellation.
If the client does not use an overdraft facility, some banks may be charged an overdraft fee. Often banks charge fees for canceling overdraft loans.
Good Finance offers to open an overdraft with a current account type free of charge. The maintenance of an overdraft for a current account type is free of charge.
As the table suggests, many banking companies already offer the establishment and maintenance of an overdraft facility free of charge and the overdraft limit need not be just a small amount. It is still worthwhile to compare more providers, read the terms and assess their ability to pay off debts before it is set up.