An overdraft facility can be expensive for many bank customers. Conversely, expensive overdraft interest can be saved with an installment loan, according to the comparison portal Verivox. Anyone who is 4,000 euros in the red and wants to pay this amount back over three years can save 300 euros in interest by refinancing to an installment loan – according to a model calculation.
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“An overdraft facility is helpful for short-term financial bottlenecks,” says Oliver Maier, Managing Director of Verivox Finanzvergleich GmbH. “However, if the account is permanently in the red, consumers should urgently look for cheaper alternatives.” According to a study by Bafin, around 25 percent of young adults use their overdraft facility – and often pay high interest for it.
Difference of 320 euros
A study by Stiftung Warentest from January 2024 shows that banks charge an average of 12.06 percent overdraft interest. In comparison, borrowers with average creditworthiness can get an installment loan from cheap banks at an interest rate of just 6.89 percent. Debt restructuring can therefore be worthwhile: Anyone who balances out a negative balance of 4,000 euros with an installment loan and repays it within three years will only pay 425 euros in interest under these conditions. In comparison, repayment over the same period at the average overdraft interest rate would cost 745 euros – a difference of 320 euros.
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Banks have a duty to advise
According to the Bundesbank, the national average interest rate for installment loans was recently 8.32 percent. Under these conditions, bank customers pay a total of 514 euros in interest if they refinance 4,000 euros and pay it off within 3 years. This is 89 euros more than would be due for a cheap installment loan, but still 231 euros less than for an overdraft facility. Banks are legally obliged to inform their customers about alternatives to an overdraft facility if they are in the red for a longer period of time.
Specifically, banks must seek dialogue if bank customers use up an average of 75 percent of their overdraft limit for more than six months or use more than half of their monthly incoming funds in an overdraft for more than three months. “Consumers should not accept the first offer that their bank recommends,” stresses Maier. “Without a prior comparison of the various providers, borrowers almost always pay more interest than necessary.”
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Financial overview helps
To ensure that debt restructuring does not lead to new financial difficulties, borrowers should set the monthly installments so that they do not slip into overdraft again. Even an installment loan with a low monthly installment and a longer term is significantly cheaper than an expensive overdraft. In addition, many debt counselors advise reducing the overdraft limit after the account has been settled in order to avoid getting into debt again.
A household book – whether digital or on paper – helps you keep an eye on your finances. “Modern banking apps often offer integrated household books that automatically record and categorize all income and expenses,” says Maier. “This allows consumers to keep a full overview of their budget and avoid falling into the overdraft trap again.”
