A current account credit is designed for bridging financial bottlenecks in the short term. Once granted, borrowers can use this line of credit flexibly. The best known type of current account credit is the overdraft facility, which many banks grant as standard for checking accounts. But companies and the self-employed can also apply for the overdraft facility.
The essentials in brief
- The current account credit is a flexible credit line.
- Without a (renewed) application, borrowers can call up any loan amount up to a predetermined maximum amount.
- As a rule, the term “current account credit” is used in connection with business accounts.
- Borrowers usually pay high interest rates of 5.0 to 15.0 percent pa for this high degree of flexibility
- Due to the high costs, the overdraft facility should only be used to bridge shortages at short notice.
Current account credit: definition
A current account credit is a loan that borrowers can call up flexibly after a single application. However, the term “current account credit” is mostly used in connection with business accounts, so it is rarely available under this name for private borrowers.
However, the basic properties are the same for both variants:
- Loans with a comparatively low loan amount
- Flexible access by the borrower after a single application
- Relatively high lending rates
- No fixed repayment modalities
- Suitable for the short-term bridging of financial bottlenecks
How does the current account credit work?
In the case of a current account credit, the account holder receives permission from the account-holding credit institution to overdraw his account up to a certain amount. This means that a negative credit – i.e. a minus – is created on the account.
The value up to which an account can be overdrawn depends primarily on the amount of regular cash receipts. Banks, for example, grant a private person a current account credit that is two to three times the regular salary.
Example: Mr. Meier earns $ 2,400 net every month. His bank grants him three times this amount for overdrafting, for a total of 7,200 USD. Up to this amount, Mr. Meier may overdraw the account at any time.
Difference in current account credit between individuals and companies
The term overdraft facility is usually used in connection with business accounts. The line of credit that is granted to a private individual on the checking account is known as an overdraft facility (abbreviated to overdraft facility). As already indicated, the overdraft facility and the overdraft facility are similar. Overdrafts for a checking account are agreed in both cases.
In principle, the main difference between the overdraft facility for private individuals and the overdraft facility for companies is the intended use. The overdraft facility, which is often granted without further checking when salary is received regularly, serves to bridge financial constraints until the next salary is received.
The current account credit, on the other hand, is intended to service important liabilities, such as wages and salaries of employees, before the expected payments have been made by the customer to the business account. Before a company receives a current account credit for the company account, there is usually a comprehensive credit check. Businesses may be required to provide overdraft facility collateral. It is therefore a business line of credit to financially stabilize ongoing business operations.
There are other reasons why a current account credit makes sense for companies/sole traders: For example, if a supplier offers a lucrative discount on a large invoice, it often pays off to claim the current account credit because the usable cash discount amount of the invoice is higher than the cost of the short-term overdraft. Note: Banks also refer to the overdraft facility as a current company loan or have created other individual terms for it: flexible business loans, SME monthly loans, seasonal loans, interim loans, overdrafts and other word creations can be found in the banks’ portfolio.
Who gets a current account credit?
As a rule, private individuals with regular salary payments receive the overdraft facility (= overdraft facility) without any further requirements having to be met. Even students without an income often grant banks overdraft facilities of a few hundred USD. Companies that pass the bank’s credit checks also have access to a bank overdraft facility.
What is the difference between a current account credit and a loan?
There are several differences between a current account credit and a loan. The most important features are summarized in the following table:
The biggest disadvantage of a current account loan compared to a loan is the much higher interest rate. A current account credit is one of the most expensive loans that consumers can borrow. It is always cheaper to take out a loan with a fixed credit term and fixed repayment agreements than to permanently use the overdraft facility – at least for planned investments. The current account credit should only serve to bridge financial bottlenecks for a few days or a maximum of a few weeks.
What is the difference between overdrafts and overdrafts?
In everyday language, very few private individuals distinguish between a current account overdraft facility, i.e. the overdraft facility, and an overdraft facility. From a legal point of view, however, they are two different things, which is also due to the interest burden.
While the overdraft facility is approved by the bank and allows the account to be debited even if there is insufficient credit, an overdraft account does not have to be tolerated. For example, banks can withdraw direct debits or prevent transfer orders or card payments. If banks allow the overdraft, this often results in a higher interest rate.
How high are the current account interest rates?
The interest on the current account credit is around 6.0 to 12.0 percent, depending on the bank. For comparison: For conventional installment loans, borrowers usually pay significantly less than 5.0 percent in interest. Note: The interest for a current account will of course only be incurred if a sum of money is claimed beyond the existing current account balance. The bank calculates the costs to the day.
Why is the current interest rate so high?
The use of a current account credit is very convenient for the customer. Banks often do not check documents for private individuals, some grant the current account credit practically automatically after at least three months in a row that they have received their wages.
When it comes to a business account, the granting of the overdraft facility precedes the examination of the basic financial data and the creditworthiness, but companies also benefit from the flexibility of an overdraft facility. You can use the revolving loan as flexibly as you need it. No fixed repayment rates have been agreed for the overdraft facility, the repayment is flexible in terms of time, as incoming payments are offset against the overdraft facility granted.
The credit institution must ensure that there is always enough money available so that customers can exhaust the committed credit line. In principle, this means that the bank becomes active and borrows money on the capital market as soon as customers pull the current account. The interest rates for short-term money from the capital market are quite high in comparison. The bank passes these additional costs on to the customer.
And another point from the bank’s perspective is decisive for the high interest rate: it does not know when and to what extent the account holder uses or repays the loan. That’s how much customer focus and flexibility banks can pay with a higher interest rate. Tip: With a view to the high interest rates on a current account credit, it is strongly recommended that consumers compare several offers with one another. Only a few tenths of a percentage point difference can make a lot of money depending on the amount and frequency of the current account line used.
Current account credit: Calculate the daily interest
There is a simple overdraft facility formula to calculate the interest on the overdraft facility:
(Claimed amount x interest rate x number of overdraft days)/(365 × 100) = interest
The following example calculates the current account interest for an overdraft of 5,000 USD for 20 days at an interest rate of 10 percent:
($ 5,000 x 10 x 20)/(365 x 100) = $ 27.40
It is not difficult to calculate the current account interest if the individual factors are known.
Current account credit: advantages and disadvantages
The current account credit is a flexible lifeline, which is available at any time to bridge financial bottlenecks. Compared to the loan, however, it is significantly more expensive. Individuals and companies should handle financial flexibility with care because it carries the risk of becoming permanently indebted. It makes sense to reschedule a permanently overdraft credit. Appropriate installment loans are suitable for this. They have significantly lower interest rates and are repaid in scheduled installments on fixed dates.
Alternatives to the overdraft facility
An on-demand or framework credit offers an alternative to the expensive disposition loan for private individuals. With this, consumers can have money transferred from their credit account to their checking account at short notice. As with the overdraft facility, repayment is flexible and interest only accrues on the loan actually paid out. These are usually lower, but variable, so that the loan can become more expensive in the short term.
Other alternatives for private customers are small loans, which mean a low interest burden due to their short term, or a credit card, which offers the possibility to use a loan for purchases free of interest for a certain period of time. So-called charge cards are billed at the end of the month, so that consumers can claim an interest-free loan from the time of purchase until that point.
For companies that lack money for larger investments, the USD loan (shortened for USD money market loan) is one option. These can be loans that a bank cannot or may not finance on its own. For this purpose, banking institutions or large companies come together for a large financing pool from which the desired loan can be issued. Interest rates are usually low and the loan is short-term – however, USDcredit is generally only suitable for groups and large companies.
Tip: At finance check, consumers have the option of receiving free and anonymous offers for debt rescheduling or an installment loan in general. Using the comparison calculator, you can quickly find the right loan and save hundreds of USD. In addition, finance check also offers the option of receiving advice from an experienced credit specialist by telephone.