First of all, it is good to know that you can repay an overdraft granted in the current account at any time. You do not have to observe any notice periods for this revolving credit granted until revocation. In contrast to an early repayment of a cash loan, banks do not charge prepayment penalties. Announcement of repatriation is also not necessary. To get rid of the expensive overdraft facility, all you need to do is make a transfer in favor of your checking account. It is entirely up to you whether the funds for this transfer come from a new cash advance or other sources of money.
The right course of action
If your bank is one of the institutions that does not actively respond to its customers for cheaper credit than the overdraft facility, you should contact your bank advisor. Almost every institute also has a cash credit in its product range. With a few exceptions, this is almost always significantly cheaper than the overdraft facility offered. But be careful: The conditions for cash loans, which are tied to a constant and therefore constant borrowing rate throughout the credit period, can vary significantly depending on the provider. The applicant’s credit rating also plays a role here.
Before you sign the loan agreement, you should always consult one of the many loan comparisons offered online. Once you have made your decision and received the loan approval, the procedure is very simple: all you have to do is sign the contract in which you previously specified your overdrafting current account as the payment account and make it available to the provider again. A few days later, the credit amount will be credited to your checking account.
Possible interest rate advantages
When talking about rescheduling a overdraft facility, the focus is usually on the interest benefits that can be achieved. And that can actually be significant. Currently (November 2014), the average interest rate payable on a overdraft facility is around 10 percent. An average interest rate of around 15 percent is charged for an unauthorized, tolerated overdraft. For an installment loan, on the other hand, depending on the desired term, an average of only 5.5 to just under 6 percent is required.
Depending on the provider, the interest rate for an overdraft facility can also be between 7.5 percent and just under 13 percent. The interest rate for a cash loan, on the other hand, currently varies between 2.75 percent in the optimal case and 12.99 percent in the maximum case, depending on the provider and / or the applicant’s creditworthiness. Based on the average values, there is an interest advantage of up to 135 USD per year with a long-term overdraft facility of only 3,000 USD if this is replaced by a cash credit:
Overdraft facility: 10% on $ 3,000 = $ 300 pa
Cash loan term 36 months: 5.5% to $ 3,000 = $ 165 pa interest advantage $ 135 pa
Cash loan term 84 months: 6% to $ 3,000 = $ 180 pa interest advantage $ 120 pa
Liquidity disadvantages due to debt restructuring
As interesting as a debt rescheduling measure can be with regard to the possible savings in interest rates, it also has disadvantages. It is generally to be welcomed that the cash loan, unlike the overdraft facility, is being repaid in regular monthly installments. However, if liquidity is very scarce, the necessary repayment of the loan can also be a disadvantage. Therefore, check very carefully whether you can cope with the monthly charge arising from the cash borrowing on a permanent basis.
In our example, a cash loan limited to 36 months with an interest rate of 5.5 percent would mean a monthly charge of 90.59 USD. If you choose a loan term of 84 months, a monthly installment of 43.83 USD would still have to be paid based on the then applicable average interest rate. Debt restructuring can only be considered a sensible measure if the monthly liquidity outflow is also acceptable in the longer term. If this is not the case, you should not look for a cheap cash loan, but consider a counseling session with a debt counseling center.
Beware of debt rescheduling
There is always a risk of increasing debt as a result of a debt rescheduling measure if you do not have the overdraft line deleted from your checking account after the overdraft facility has been paid off. So there is a great temptation to overdraw the current account again at short notice. A short-term overdraft facility can then easily become a short-term overdraft. If you allow that, you have taken the first step into the debt spiral. Therefore, after the discard return, have the overdraft line withdrawn to a reasonable, small amount that is sufficient to cover short-term overlaps.
Almost always involved: Credit Bureau
You cannot get a loan or even an account from a German banks without the institution where you came in contact with Credit Bureau. Therefore, do not hide the amount of the overdraft facility granted or any other credit obligations that may exist in the course of borrowing. The provider of your choice will find out everything anyway and will hardly provide you with a loan if the information is incorrect.
The Credit Bureau Score, a key figure determined by Credit Bureau based on various data and your credit history, is often not only decisive for whether you get the loan at all. If you have applied for a loan with credit-dependent conditions, he decides together with your income about the interest rate to be paid for it. If you only have an average or weaker credit rating, you are usually better advised with a loan on terms that are independent of credit rating.
In particular, because of the data stored at Credit Bureau, it is necessary that you specify the repayment repayment as the purpose of the loan application. If you neglect this, the existing credit facility and the new loan applied for will be added together when checking your loan request, which could lead to a loan rejection.