Almost every checking account is equipped with a hidden credit line, the so-called overdraft facility. As soon as you open a current account, you automatically take out credit, the so-called current account credit. As is well known, this is very easy, without an application and without consulting the bank. This entices many consumers to overdraw their accounts, it is so easy and convenient.
The bad awakening comes with the quarterly statement at the latest when the bank collects the costs for the overdraft interest. At that moment the consumer realizes that he has borrowed money at extremely expensive conditions. However, it only becomes really expensive when the account is permanently in the red, then the interest costs add up to considerable amounts.
Why are the overdraft rates so high?
Overdraft interest rates have been in the focus of consumer protection for years, they have long been demanding a cap and refer to the considerable difference between the overdraft and key interest rates. At times, banks can borrow money from the Lite Lender for less than one percent and then pass it on to their customers as an overdraft facility for over 10%. An incredibly profitable business that banks absolutely want to maintain.
They put pressure on politicians through lobbyists to prevent the repeatedly discussed interest rate ceiling for overdrafts. With success, there is still no majority in sight for regulation in favor of the consumer.
Ultimately, banks can also take such high overdraft rates because they know that consumers are reluctant to switch to another bank with their checking account. There is hardly any competitive pressure in this area
What to do about high overdraft rates?
Consumers have only two options to counter excessive overdraft rates. Either they really switch banks – a step that involves a lot of paperwork – or they replace the overdraft facility with a regular installment loan.
The second option is often the easiest. Direct banks already offer small consumer loans at very favorable interest rates. With such a “bargain loan” you can replace the expensive overdraft facility in one fell swoop.