The overdraft facility is extremely expensive – you get the same flexibility with a credit facility, only cheaper. When opening an account, the bank gives you some leeway to overdraw the account, the credit line. As is known, you can overdraw your account up to this agreed credit line and keep it in the debit. If you overdraw your account, you are already taking out a loan from the bank, the overdraft facility. Of course, the overdraft facility has the clear advantage that it is very flexible and you can get money at short notice if the liquidity is not as good as you would like it to be. The overdraft facility may have a clear advantage for bridging, but it also has a major disadvantage: it is pretty much the most expensive loan that a private customer can take out.
Overdraft facility: flexible but expensive.
The overdraft facility is known to pay high interest. Even in phases in which the interest rate is lower, up to 13 percent of interest may be due if the credit line is exhausted. The question remains whether the high interest rate means that you won’t pay more sooner than you could have done with a normal installment loan. The terms of the installment loans are a lot cheaper than overdrawing the account, and yet many choose an overdraft facility, although an installment loan would not be a problem for them.
Even if you have already used the overdraft facility, we strongly advise you to reschedule an installment loan in order to avoid the high interest rates for the most part. There is also an alternative to the overdraft facility and the installment facility: the framework facility. The credit line is probably not very well known to many. You could say a bit flat that the framework loan is a kind of mixture of overdraft and installment loan, whereby the interest is not nearly as high as with the overdraft facility.
The alternative to the overdraft facility: the credit facility.
The terms of the credit line include a line of credit for the customer, similar to the overdraft facility. You can, but do not have to fully use this agreed credit line – it is up to you how much money you want to raise. This makes the difference to the installment loan clear: the installment loan always pays out the amount that is available to you. The credit line is different here: If you have been granted a credit line for a certain amount, you can vary the amount flexibly. You can have the entire amount paid out at once or use only part of it. Repayment is just as flexible, but a minimum repayment is often agreed with the bank when the loan framework is granted.
The flexibility of the credit line
This minimum repayment means that you, as a borrower, have to repay a certain amount each month – this can be, for example, five percent of the remaining debt. This real flexibility is also evident here again. If you have a credit line for your framework loan of 10,000 dollars and you have fully exhausted it, you can of course not take up another framework loan. However, if you have already paid back 3,000 dollars out of the 10,000 dollars, you can access the 3,000 dollars you have already paid in at any time. Only when the framework is fully utilized can no further framework credit be taken out.