- What is overdraft interest on a checking account?
- Consequences of the interest rate reversal: Interest rates for overdrafts are rising sharply
- The rate of interest can be the start of debt careers
- FAQ: Frequently asked questions and answers
What is overdraft interest on a checking account?
If you have a checking account that receives money in regularly, you can usually withdraw it up to an amount defined by the bank. It is common three times the monthly net income. This credit is called an overdraft, a current account overdraft, or simply a current account overdraft.
If account holders use this option, they must Pay significantly higher interest than another loan as an installment loan taken out over a certain period of time at fixed repayment rates. The overdraft is therefore intended as a short-term overcoming of temporary liquidity bottlenecks and not as a long-term solution to borrow money from the bank.
However, more and more people in Germany are taking advantage of the current account overdraft: in 2021 there were 6.6 million citizens, a 17 percent increase compared to the previous year.
Banks also allow most of their customers to withdraw their account over the overdraft limit. In such cases, the so-called Overdraft interest is due, the rate of which is still significantly higher than the overdraft interest. However, more and more banks are refraining from this and charging overdraft without a surcharge. Overdraft interest is accrued even if the account is overdrawn even if the bank had not granted an overdraft.
Interest rate for overdraft under discussion
Differences in the amount of overdraft interest are sometimes significant from bank to bank. For some financial institutions, the income from this interest is part of the business calculation. Therefore, consumer advocates and some politicians have long been calling for an interest rate ceiling, i.e. a maximum value that must not be exceeded and which could be, for example, around ten percent. However, such a step has not yet been implemented.
Consequences of the interest rate reversal: Interest rates for overdrafts are rising sharply
The amount of this overdraft interest is variable and depends on a reference interest rate, such as the three-month Euribor or the ECB’s reference rate. If this increases, banks usually also increase the overdraft interest with a slight delay.
During the long phase of the low interest rate policy, overdraft interest rates were already at a relatively high level. Since the del As a result of the interest rate turnaround initiated by the European Central Bank (ECB) in 2022, overdraft interest rates will continue to rise. The “Finanztest” magazine had one in May 2022 An average interest rate of 9.25% was determined, just six months later it was already 9.89%. The most expensive bank even took nearly 14% interest in November 2022.
An example: If you take an average of $5,000 out of your account a year as part of your overdraft line, you have to pay it off at most banks at the end of the year. Pay up to $500 or more in interest.
If interest rates continue to rise, it could hit some consumers hard: due to high inflation, the purchasing power of money is already falling sharply, so that account holders: inside slip into the overdraft faster before. And now they have to pay dearly for it. The overdraft risks becoming a trap for over-indebtedness.
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The rate of interest can be the start of debt careers
Overdraft is actually a nice thing: if you need more money for a short period of time than is available in the account, you can use overdraft and you don’t have to borrow money in other ways. And on a day-to-day basis, relatively high interest rates matter little. But if you regularly live on the verge of minus, you can quickly find yourself in a downward spiral financially.
FAQ: Frequently asked questions and answers
When does overdraft interest accrue on the current account?
As soon as your account is debited with more than your available credit, overdraft interest is generated.
Does overdraft interest have to be paid monthly?
This differs from bank to bank. Overdraft interest is usually charged at the end of the month or quarterly.
Which bank has the cheapest overdraft rates?
Interest rates are variable and change often, so even the cheapest providers change. It is worth comparing banks with regards to overdraft rates.
Please note that our articles are purely editorial content that provides an overview of a specific topic. American Express does not provide investment advice or make recommendations. The topics we cover, such as credit and loans, stocks and bonds, insurance and others, are always risky, which is why you should always talk to experts if you are planning further steps in this direction. American Express assumes no liability.
