Overdraft facility and overdraft interest

In short: The overdraft allows you to take the current account into the red up to an agreed amount, but it is usually very expensive and suitable only for short gaps.

In more detail: The overdraft facility (“Dispo”) is a credit line on the current account. If the account slips into the red, this amount is granted automatically as a loan without having to apply for anything. It is convenient, but the interest is often in double digits and thus well above other loans.

In Depth

Overdraft and tolerated overdraft

Up to the agreed limit the overdraft rate applies. Whoever overdraws beyond that is in the tolerated overdraft, which can be even more expensive. The bank may then also reject payments, and direct debits can bounce (return-debit fees, reminders).

Example calculation

At 12 % interest an average overdraft of €500 over a year costs about €60 in interest. For 3 months it is about €15. The rule of thumb: interest = amount × rate × days / 360 (in banking usually 360 days). Whoever is permanently overdrawn pays a lot for money they never get back.

What consumers should know

The bank must state the interest rate, overdraft amount and costs in the contract. After longer use (for example permanently above 75 % of the limit) it must in Germany offer a conversation and alternative offers such as a cheaper instalment loan. For minors and apprentices the overdraft is often not set up at all or is smaller.

Alternatives

• Build an emergency fund so that no overdraft is needed.
• Plan payments beforehand with a household budget.
• For a one-off need check an instalment loan with lower interest.
• If you fall behind, talk early with the bank or creditors and use debt counselling (free from welfare organisations).
• Be careful with “instant cash” offers and very expensive short-term loans.

See also: Emergency fund, Household budget, 50-30-20 rule, Compound interest