Overdraft facility or “overdraft account” | Loan now

 

A current account credit is the possibility to overdraft a current account for a limited period by a predetermined amount. It is granted to the owner by the bank and serves to bridge short-term bottlenecks in solvency. Therefore, it is also a way to finance a purchase quickly and easily, as long as you are able to pay it off in the foreseeable future.

The current account credit is characterized by the fact that it can be called up at any time. The owner of the current account is therefore not obliged to announce the use in advance. Current account credits are also repayable at any time, there are no installments or similar.

The current account credit is legally a loan in the sense of the German Civil Code. However, it is more flexible in terms of terms, amount and repayment options than a normal loan. The bank must guarantee that the loan amount is available at all times. At the conclusion of the contract, a limit is set which the borrower may use to the maximum. However, he is completely free to choose whether to use the full amount or only partial amounts. In both cases, the bank must ensure that the money is available and can be paid out.

Types of current account credit

Types of current account credit

  • The most common form is the overdraft or short Dispo. This is a current account credit granted to private individuals for their own current account. It is very widespread and is granted to many customers by their bank. A current account credit can also be very helpful for companies. They help them to avoid short-term financing bottlenecks.
  • The most common is the working capital loan. For example, companies can use this to compensate for any time lapse between payment obligations and sales receipts. A current account credit is also a useful option for companies that are very dependent on a season. If the costs are incurred before the earnings season begins, a working capital loan provides the necessary remedy.
  • Another type of overdraft facility for companies is interim loans. For new projects, it can happen that the financing is theoretically secured but the money cannot yet be used. This may be due, for example, to the fact that certain home loan savings contracts are not yet available, or that equity capital may only be accessed after the investments have matured. In order to avoid delays, companies can then use an interim loan. For credit companies, this type of overdraft facility is associated with a relatively low risk, since the financing is already secured and can only be used at the current time.
  • Pre-financing works in a similar way to interim loans. The big difference here, however, is that the financing of the project has not yet been secured. This can have temporal but also formal reasons. The banks run a greater risk here than with the interim loans, as the financing can still fail. Therefore, the interest rates on this type of loan are higher. Both pre-financing and interim loans are designed for an average of 1 to 2 years.

Terms and conditions

Terms and conditions

The credit limit, term, interest, purpose and any collateral are recorded in the current account credit agreement. Collateral is rarely required for simple overdraft facilities. In general, however, the higher the contractual limit, the more likely it is that collateral will be required.

Regular deposits into the account are a prerequisite for a posting control. The limit offered is usually based on this. The banks expect that a used overdraft facility will be repaid within 2-3 months. Therefore, the credit limit is usually 2-3 times the monthly deposit. The aim is to prevent long-term or steadily increasing debt through these measures.

The interest on the loans is based on the market interest rate. You only pay for the amount that is actually used and not for the credit limit. Compared to other forms of credit, they are relatively high, which is another means of preventing long-term use.

In addition to the cost of interest, overdrafts can also incur costs for credit and sales commission. The loan commission is paid for granting the loan, while the sales commission is similar to an account maintenance fee.

The contract ends upon expiry of a period or upon termination of the credit institution. In the event of termination, the loan amount is due immediately. If an amount falls due due to a deadline, this does not necessarily end the credit relationship. A tacit agreement may have been reached that continues to entitle the borrower to use the loan volume.

overdraft

overdraft

A limit is set for each current account credit, up to which the borrower can exhaust the loan. The limit represents the maximum amount that is available. However, if the borrower determines that the amount is insufficient, he must notify the bank and negotiate with him about the possibility of an overdraft. The bank is under no obligation to allow an overdraft that has not been agreed.

If an overdraft has been approved and it is actually used, further interest will be due for this. The overdraft interest is somewhat higher than the already relatively high current account credit interest and is intended to keep an overdraft as short as possible.

A special case is a “tolerated overdraft account”. This is the case if an overdraft has not been agreed with the bank in advance, but is nevertheless tolerated by it. If this overdraft is tolerated for a period of more than 3 months, then it is considered tacit consent to a new loan agreement. Therefore, this type of overdraft poses a risk to the banks.

Debt credit – rip off credit

When rescheduling, the obligations are changed, but not the amount owed. To repay loans, the borrower can choose other forms of credit and / or change the lender. The need to reschedule existing debt can arise for a number of reasons: particularly low market interest rates are used or excessive costs of existing credit obligations have to be avoided. Securing liquidity by extending the loan terms may also require rescheduling.

Certain loan relationships, such as a maturity loan or mortgage loan and other fixed-interest loans that expire, will also have to be rescheduled. Loans can be rescheduled by private individuals, companies, but also states.

Paths into the debt trap

Paths into the debt trap

While debt restructuring is often the only way out of the debt trap for the borrower, excessive borrowing, the use of expensive overdraft facilities or bad economic decisions quickly lead companies and private individuals into the debt trap. Loans can be rescheduled if the borrower can barely meet the cost of the loan and an adequate repayment of the liability is impossible. With the debt rescheduling, usually lower interest rates, longer terms and therefore generally lower repayment rates are agreed.

In particular, entrepreneurial bad investments (investments or participations), high losses or insufficient equity available in the short term can lead to the insolvency of companies. In the past, it was mostly corruption, bad economic investments and high armaments expenditure – or a combination of the factors – that led to overindebtedness.

Benefits of debt restructuring

Benefits of debt restructuring

The conversion of existing credit relationships can reduce interest charges and / or repayment rates. In accounting terms, the interest charges are expenses in the sense of accounting, while the repayments burden the liquidity of the borrower. To avoid over-indebtedness or insolvency, cheaper financing options should be used. Not only companies, but also private individuals can go bankrupt. In addition to the affidavit, personal bankruptcy is an option for natural persons to be released from payment obligations in a given period. Even during private bankruptcy, the involved insolvency administrators and advisors try to consolidate and reschedule the loans.

However, the debt relief often associated with personal bankruptcy is not a debt rescheduling in the legal sense. The debt rescheduling ideally leads to a reduction in the repayment burden (due to lower interest rates and possibly adjusted repayment modalities) and can thus improve the liquidity and thus the scope of action of the borrower.

Debt restructuring opportunities

Debt restructuring opportunities

Lower interest rates, also due to the change between fixed and variable interest, lead to lower costs for the loan, which enables higher repayments. A financial relief can also be brought about by extending the loan term. The consolidation of loans, which converts short-term into long-term liabilities, enables a longer loan term. The long-term liability is mostly used to offset existing short-term loan agreements.

Suspension of repayments or final repayments, also called “bullet payment” (repayment at the end of the term), are also suitable measures to ensure the liquidity of the borrower. Neither the deferral nor the debt relief count as rescheduling, since in these cases the debt is not reduced by repayments; in the event of a deferral, interest and repayments due are only suspended and thus deferred. However, if the deferral affects the term, this extension is considered a debt rescheduling.

Legal implications of debt restructuring

Legal implications of debt restructuring

If the obligation remains and is only changed by additions such as contract supplements or supplements, then it is a change in obligation. However, if a new credit contract is concluded, with or without a change of lender, there is a novation with which the original credit relationship ends in accordance with §241 BGB. In the case of in-house debt restructuring, for example to replace a current account credit with an installment loan from the house bank, there is basically a contract change. As a legal consequence, a guarantee for the current account credit may be transferred to the new loan.

Debt rescheduling in the private sector

Debt rescheduling in the private sector

Debt restructuring offers itself not only to benefit from cheaper interest and repayment rates, but also to restore creditworthiness. In the private sector, debt rescheduling can be used to combine the loans resulting from various obligations, such as partial payment purchases from mail-order companies, installment loans and bank overdrafts, to form a total debt. A longer loan term, combined with cheaper annual interest rates (nominal interest plus the loan costs) enable the borrower to have an improved financial situation and easier and more transparent planning of the financial budget.

When rescheduling the loans, it should be noted that additional costs may arise for the termination or for taking out or providing the subsequent loan. Loans with variable interest rates can generally be terminated with a notice period of three months. Fixed-rate loans can be terminated six months before the fixed interest rate expires. If a fixed interest rate of more than 10 years has been agreed, this can still be terminated at the end of the 10-year period.

If, however, the fixed-interest loan contract is terminated before the fixed interest period expires, the lender will request a prepayment penalty (VFE), which was agreed upon when the loan contract was concluded. Depending on the possible new conditions, even the payment of the prepayment penalty can have an advantageous effect on the financial situation of the rescheduling borrower – for example, if the savings from the new conditions exceed the costs of the VFE. In the event of early repayment of home loan, no prepayment penalty will be charged.

Mortgage loans that are granted when buying or building real estate are usually provided with a fixed interest period, after which rescheduling of the remaining debt must be entered into. The follow-up financing can be concluded with the lending bank or with a new lender, although additional costs for the changes to the land register entries are due and must be paid by the borrower. The mortgage loan is also suitable for debt rescheduling in the private sector, for liabilities that are not caused by building a house or acquiring a home. Mortgage rates are usually particularly attractive due to the transfer of property rights.

To ensure rescheduling or follow-up financing, the borrower can also take advantage of a forward loan. The forward loan ensures the favorable interest rates on the capital market for a loan that will be sufficient in the future. However, the lender charges a fee for the period until the loan is paid out: the commitment interest. Interest payments on the loan or repayments, however, are only due when the loan amount is paid out in the future.

Debt restructuring of corporate loans

Debt restructuring of corporate loans

In certain legal forms, such as the GmbH (limited liability company), the entrepreneur is legally obliged to report insolvency. Failure to do so could result in fines and imprisonment. However, investors and capital providers of the company must also be informed about critical indebtedness and the financial situation of the company. In order to determine the solvency and the financial basis of the company, business indicators are used, which can also be used to analyze the equity and debt structure or the level of debt.

The company’s debt sustainability results from the ratio of liabilities, including lending service (interest and repayment service) to cash flow. If the liabilities permanently exceed the operative cash flow by 400 percent or if the debt service exceeds 50 percent of the cash flow (DCR), the company’s debt situation is considered critical – although more accurate comparative figures depend on the industry. The debt cover ratio (DCR), also known as debt service coverage ratio, states whether the cash flow is sufficient to service the debt or whether the servicing of the loans is at risk. If the DCR is exceeded permanently, the company is in crisis. It makes sense to seek debt restructuring with the creditors with the highest liabilities.

Debt rescheduling

Countries in crisis can also consider rescheduling their foreign debt, but this is not referred to as rescheduling, but mostly as “restructuring”. The extent of the state crisis can also be determined using key figures. The states are supported by the World Bank, the Paris Club or the International Monetary Fund (IMF) in debt rescheduling.

Taking out residual debt insurance – is it worth it?

The residual debt insurance is an insurance that is also referred to as residual credit insurance or credit life insurance and is referred to as RSV for short. The purpose of residual debt insurance is to protect the borrower or sometimes his or her surviving dependents from the consequences of borrowing. The protection within the residual debt insurance is variably compatible. This means that a residual debt insurance against death, but also against illness or unemployment can be taken out. In relation to the lender, the residual debt insurance is very good protection in the form of additional credit security. For this reason, residual debt insurance is often ceded to the lending banks when borrowing. In Germany, residual debt insurance accounted for 2.9 percent of the total insurance sums in 2009. The average amount of residual debt insurance in Germany in 2009 was 11,600 USD.

The importance of residual debt insurance

The importance of residual debt insurance

The residual debt insurance can be taken out by the borrower as well as by the lender. If the lender takes out residual debt insurance, this agreement is made at the borrower’s expense. The protection can be against death, illness and incapacity for work as well as unemployment within the credit period. The insured person is always the borrower. In the event of the borrower’s death, the insurance will assume the remaining debt from the loan taken out. This means that the insurance company will repay the remaining credit. In the event of illness or unemployment, the insurance company pays the installments until the borrower may be financially able to meet the loan again. The residual debt insurance is usually concluded within a group insurance contract instead of an individual insurance contract.

Residual debt insurance, also known as RSV in technical jargon, originated in the United States in the 1950s. The first contract of this kind was approved in Germany in 1957 by the Federal Insurance Supervision Office. In the case of installment loans and annuity loans, the RSV is usually concluded against the payment of a single contribution, which in turn is included in the loan. In the case of current account or revolving loans, the contract is such that the current outstanding balance is determined each month and that the contribution for this outstanding balance is calculated for the current month.

Different forms of protection against other risks exist today. The classic of residual debt insurance was protection against death and incapacity to work. This was supplemented in 1995 when insurance against unemployment through no fault of its own was included. The residual debt insurance was supplemented in 2006, when serious illnesses such as cancer, heart attacks or strokes were included in the benefits catalog of the residual debt insurance. For this purpose, assistance services, so-called assistances, were used to support the borrower to reintegrate into working life.

Thus, the protection within the residual debt insurance has been greatly optimized over the years of its existence. This is also important because a bank customer has a long repayment obligation to the bank when taking out a loan. It is therefore inevitable to consider what happens in the event of an illness, accident or even death of the borrower. In the event of death in particular, the heirs are automatically obliged to repay the loan together with the heir. Experts recommend considering taking out residual debt insurance from a loan amount of 8,000 to 10,000 USD. An alternative to the residual debt insurance can be to overwrite an existing risk life insurance for protection. However, life risk insurance only pays in the event of death, so only covers survivors in the event of a loan default.

In addition, borrowers can also check their existing occupational disability insurance to determine whether there is sufficient coverage for the repayment of installments in an emergency. As a rule, most providers of installment loans have the residual debt insurance in a package with the loan for the conclusion and usually the providers also insist on the conclusion of a residual debt insurance before the conclusion of the lending business, unless there are adequate alternatives.

Criticism and disadvantages of residual debt insurance

Criticism and disadvantages of residual debt insurance

The consumer advice center often criticizes the amount of the premiums for the residual debt insurance and the coupling of lending with the residual debt insurance as a sales method. Often, taking out residual debt insurance involves relatively high commission amounts for the credit intermediary or the clerk at the lending bank. These not inconsiderable costs have a noticeable impact on the total cost of the loan for the borrower. Borrowers should also bear in mind that only a few banks take out residual debt insurance to improve credit scoring. If the lender prescribes the conclusion of the residual debt insurance so that a credit transaction takes place, then borrowers should make sure that the costs for this insurance must be legally binding in the annual percentage rate.

As a rule, it is up to the borrower to take out residual debt insurance with most providers. Nevertheless, the residual debt insurance is often advertised aggressively in order to earn final commissions. Residual debt insurance has to take further criticism with regard to the contractually fixed cut-off periods for the benefits. Some require that insurance coverage only comes into force after a contractually stipulated period has expired. Here experts speak of a so-called waiting time. Furthermore, some insurance contracts include a so-called waiting period, which means that unemployment or incapacity to work must exist for a certain period of time before benefits can be claimed.

Advantages of residual debt insurance

Advantages of residual debt insurance

An important advantage that exists with the residual debt insurance is that, unlike the individual insurance, there is no acceptance or health check. This ensures fast and uncomplicated insurance protection. Policyholders should, however, take into account that the vast majority of insurance claims due to the existing medical conditions known and existing at the time of conclusion are excluded from the benefit within the first two insurance years of the residual debt insurance. Protection in the form of residual debt insurance for existing pre-existing conditions in this time frame is either limited to the so-called non-pre-existing conditions, as well as reasons for the inability to work or the cause of death. In addition, residual debt insurance is a purely private law protection against the risks of unemployment through no fault of your own.

Important aspects of residual debt insurance

Important aspects of residual debt insurance

The insurance premium is payable with the residual debt insurance within a one-off amount together with the conclusion of the credit contract. The contribution is added to the loan amount. This automatically increases the cost of the loan. One should note the sum insured that comes into play when taking out residual debt insurance. Especially with long terms of the insurance and the loan contract, this can result in an enormous increase in the cost of the loan. Other providers provide protection that is too low for the loan amount. Experts therefore recommend that the content of the residual debt insurance be checked carefully.

The rule says that as a borrower, you should reject the offer if the costs take up more than ten percent of the loan amount. In addition, borrowers should ensure that if the bank takes out a residual debt insurance with a single premium, there is an obligation to include the resulting costs in the effective interest rate. If you decide to take out residual debt insurance, reading the fine print is essential. Protection can be excluded from the outset by the insurance company in the case of various previous illnesses. Other contracts do not take over until a three-month waiting period has been exceeded.

It is also important to know that there is no insurance for unemployment protection if the borrower cancels his or her employment contract or if this has existed for a limited period when the residual debt insurance contract was concluded. In all of these cases, the meaning of taking out residual debt insurance may prove questionable. An alternative could then be for the borrower to pay the amount that would have been due for the policy into a savings plan. This enables the borrower to secure important reserves and, in the best case scenario, saves him the opportunity to redeem the loan early.