The term “current account credit” used to stand for what is today known as a disposition for private persons and working capital loan for companies. The name is derived from the current account. An older name that has been replaced for many years by the term “checking account”.
- A current account overdraft is an overdraft facility on the checking account.
- There are overdrafts for individuals and for companies, as so-called working capital loans.
- These disposables are comparatively expensive, but the borrower benefits from a high level of flexibility.
- An alternative is credit.
What is a bank overdraft?
The current account overdraft is a classic overdraft facility. In contrast to a normal loan, the amount of money is not posted to a specific credit account, but the bank allows for the uncomplicated overdraft of the account, if regular cash receipts are to be expected. The current account credit is thus used for short-term financing.
The current account credit is the discretionary credit for self-employed persons and companies. How it works and how it works is shown by our infographic.
The characteristics of this loan must be differentiated between private account holders and companies. Individuals are usually given informal charges, depending on their monthly income. There is no separate credit agreement for this.
This is only used for private households if there are special features, such as the amount of the loan or possible collateral. Since there is no credit agreement, the bank can revoke the credit at any time partially or completely with a certain lead time.
Somewhat different, since the order of magnitude high volume, it is in a current account overdraft for companies. Working capital loans are used, for example, for the purchase of raw materials or goods or to bridge seasonal revenue gaps.
This form of overdraft usually requires a loan agreement and the provision of collateral security by the entrepreneur. The loan agreement may also include a possible term or maturity of the loan.
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Why so expensive?
Again and again banks are caught in the crossfire of criticism by the consumer advocates. They complain that overdraft rates are overstated. However, account must also be taken of the following when calculating the interest: Overdraft facilities are not fixed loans but represent the option of spontaneously overdrawing the account.
For the banks, this means that theoretically they would have to provide so much liquidity around the clock that any holder of an overdraft account can use it at any time in full.
Now there are statistical empirical values, how high the exhaustion of the credit lines with the entire customer fails, so that not the entire volume must be available. Nevertheless, overdraft facilities for banks represent a loan option that limits their liquidity and thus incurs costs.
The interest calculation is always made only on the amount that was actually used as an overdraft. The interest will be charged to the customer in most cases at the end of the quarter.
Comparison with other types of financing
For example, suppose a private individual uses a dispo of 5,000 euros over one year. The interest rate is twelve percent per year. The cost of this current account credit therefore expires at 600 euros.
Significantly cheaper would be compared to a personal loan. As of March 2017, the interest expense amounts to around 60 euros for one year. In addition, the loan was replaced.
At the end of the year, the debit balance of 5,000 euros is still open. If the disposition were to be amortized over the year, the total interest would be 331 euros, five times that amount.
As an alternative to current account credit, companies offer factoring, ie the sale of receivables. The differences make this table clear:
Which alternatives are there?
Who wants to finance an asset, is definitely served with a classic installment loan at the best. The reason is the level of interest rates, which are the lowest for a installment loan. If it concerns the financing of a car, the car buyers save themselves again with a special car loan at the interest.
About two years ago, the German government demanded that banks offer their customers, who permanently overdue their accounts, more cost-effective solutions. These are certainly true, albeit with lower margins for the institutions.
First of all, the framework loan offers itself. The bank provides the customer with a credit line on a subaccount. In contrast to the Dispo, there is a credit agreement for this. This regulates, for example, what percentage of the utilized credit line the customer has to return every month.
Interest, as with overdraft, only accrues to the amount the account holder uses. The interest on a credit line is between the interest on an installment loan and the overdraft.
The alternative to the bank
Those who do not necessarily want to go to a bank can provide themselves with liquidity through special credit marketplaces. These private-to-personal lending portals allow lending to private investors.
The interest rate is based on the creditworthiness of the borrower. However, it should be noted that these credit platforms also conduct a credit check. However, unlike banks, even people with a weaker credit rating have the option of obtaining a loan.
However, those who now believe that such credit marketplaces are mainly used by consumers with poor credit ratings are mistaken. They are predominantly borrowers, who are “served” by the classical banks.
Private lending is not just for private individuals. As an alternative to working capital loans, there are platforms that provide loans to commercial users. Here are other orders of magnitude, up to the million range, possible. The funders are professional investors and private individuals.