Finance
“The pace is rapid” – overdraft interest rates are rising significantly
An overdraft facility can be quite expensive with some credit institutions. photo
© Thomas Banneyer/dpa
If you don’t have enough money in your account for unforeseen expenses, you can usually take advantage of an overdraft facility – but the interest rates have risen significantly. Critics are calling for an upper limit.
Overdraft interest rates continue to rise. “The pace is rapid. Since the end of 2022, they have increased by an average of more than 2 percentage points,” reports Heike Nicodemus from Stiftung Warentest’s “Finanztest” magazine. “Many credit institutions upped the ante on October 1st.” On average, the interest that financial institutions charge for tolerated overdrafts on current accounts is now around 12 percent (as of October 6th). At the end of 2022, the average was 9.94 percent for the 176 banks and savings banks evaluated.
If you have a checking account, you can usually overdraw it up to a set amount with the bank’s consent. The amount of the credit limit granted depends on the income and creditworthiness of the customer. It’s usually two to three months’ salary. Depending on the financial institution, the interest is usually debited at the end of the month or at the end of the quarter.
“The banks offer a service and they charge money for it. The rapid rise in overdraft interest is primarily due to the interest rate increases European Central Bank,” reports Nicodemus. With a series of ten interest rate increases since July 2022, the Eurocurrency watchdogs have been counteracting inflation, which has been significantly increased for some time.
Credit institutions increase interest rates relatively quickly
Overdrafts are likely to become more popular, especially in times of rising prices. According to their own statements, around one in six Germans can hardly afford their living costs due to high inflation. 17.2 percent of 2,059 respondents in a YouGov survey for Postbank chose this answer option when asked how they perceived the price increases.
But an overdraft can be expensive. “A frequently used overdraft facility can lead to a financial downward spiral,” warns Nicodemus. The overdraft interest rate is linked to a reference interest rate system. A common reference interest rate is the ECB’s key interest rate, and sometimes also the three-month Euribor. It goes up with a time delay when interest rates rise. “Banks don’t have to implement the increase, but they can. We’ve found that credit institutions raise interest rates relatively quickly on average. When it comes to lowering them, however, things didn’t happen quite as quickly,” says Nicodemus.
The independent FMH financial consultancy has also noticed a significant increase. Accordingly, consumers have to pay an average of 11.89 percent interest for an overdraft loan (as of October 6th). The range for 80 financial institutions examined ranges from 3.62 percent to 15.49 percent.
Discussion about caps for overdraft interest
Most recently, the consumer protection ministers of the federal states spoke out in favor of an upper limit for overdraft interest in the summer. A corresponding test order goes to the federal government, said Schleswig-Holstein’s consumer protection minister Werner Schwarz (CDU) at the end of a conference with his counterparts. The ministers consider an upper limit of five to eight percent to be appropriate.
The Federal Ministry of Justice referred to the new EU consumer credit directive, which is intended to better protect consumers when taking out loans. “As long as it has not been conclusively clarified what need for changes to German law arises from the EU directive, the Federal Ministry of Justice does not consider a legislative proposal aimed at changing consumer credit law to be sensible,” said a ministry spokesman.
Banks and savings banks reject government intervention. Consumers in particular benefit from the fact that the German banking market is one of the most competitive in Europe, explained the German banking industry upon request. “Thanks to a wide range of offers, bank customers have it in their own hands where and under what conditions they want to use an overdraft facility,” argued the umbrella organization of the five major banking associations in Germany.
Debt restructuring using installment loans
From Stiftung Warentest’s point of view, an overdraft interest rate of up to 10 percent is comparatively cheap. According to the information, this currently applies to almost 20 percent of 460 account models evaluated. “Everything from 13 percent is expensive, especially for people who use the overdraft facility very often,” says Nicodemus. Overall, the range is from 3.54 percent to 15.57 percent. “I find the more than 15 percent that we found in 18 account models really crazy.”
From the perspective of the “Finanztest” expert, consumers sometimes have it in their own hands: “Anyone who regularly uses the overdraft facility should consider whether it makes sense to refinance their debt with the help of an installment loan, which costs around half as much on average ” says Nicodemus.
She calculates: If an overdraft user is in the red by 1,000 euros at an interest rate of 11.22 percent, after three months he will be in the black with around 1,028 euros. A whole year costs around 112 euros. However, if he balances his account after a month, around 9 euros will be due. The consumer portal Biallo.de also offers an overview of the costs of checking accounts.