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Which mortgage is appropriate?

April 23, 2022 – 6:32 pm hour

We can all feel it: Food and energy have become more expensive as a result of the war in Ukraine. According to the Federal Statistics Office, inflation rose in March by 7.3 percent compared to the previous year. The last time there was a similarly large increase was 40 years ago. The result: many people have no choice but to withdraw on their account and use the overdraft facility. But there are also cheaper solutions. We show you which loan is best for you.

Five steps to get a plus sign on the account

First of all: before taking out a loan, it is worth considering if there is another way out of the overdraft dilemma. You pay interest on the money you borrow, which also eats up your budget. It is entirely possible to set the plus course on the account in five simple steps. Two financial experts explain how this works with a master plan.

However, if the account balance is already clearly red or you are using the overdraft facility permanently, then action is needed. One of the biggest cost traps of all loans is high interest rates. Online loan comparison shows you the offers of banks transparently – without any risk to the credit bureau.

Overdraft facility

An overdraft facility, actually called an overdraft facility, is often included in a current account. The bank allows the owner to transfer to a negative amount with the account up to a predetermined amount. The amount of the overdraft facility depends on the creditworthiness of the customer and is affected by regular payments received in the account, such as salary.

Advantages: An overdraft facility is usually granted without a formal loan application and can be increased without much paperwork if the creditworthiness is good. It can absorb unforeseen costs if no financial reserve is available. If the account is not overdrawn, there are no costs.

Defects: As practical as overdraft facilities are, anyone who uses them will have to dig deep into their pockets. According to the magazine “Finanztest” (October 2020), banks charge an interest rate of 9.61 percent. So if you need money over a longer period of time or you plan on purchases greater than 500 euros, it is better to take out other loans.

Expert: How to use the loan wisely

loan installment

If you withdraw from your account permanently or pay off old loans with high interest rates, it makes sense to reschedule your debts – this can be done with an instalment loan, for example. You decide how much money you need and how much you can repay each month. The bank will check your credit eligibility and give you an offer that also includes interest rates.

Advantages: The interest rates are much lower with an installment loan than with an overdraft facility, which is why an installment loan is also recommended for more expensive purchases. It doesn’t matter if it’s a bigger TV, a dream wedding or an unexpected car repair – if the creditworthiness is correct, banks give loans in installments at moderate interest rates. The rate cannot be increased due to higher interest rates, as with overdraft facilities, and installments force you to reduce debt.

Negatives: The higher the monthly installments, the faster the loan will be repaid – of course. If in doubt, choose a lower price in the long run. It is better if you can save some money and pay off the loan earlier than face difficulties in repayment due to high rates and end up having an easy overdraft again. Banks can claim a maximum of one percent of the amount as compensation if you pay off the loan early, which is manageable. Banks also offer residual debt insurance. They are intended to help when monthly installments cannot be paid due to illness, unemployment or death. However, Stiftung Warentest advises caution, because “protection is often unnecessary and moreover expensive.”

line of credit

Credit Framework – Never Heard of? This may be because the model is still relatively new and not all banks offer a line of credit. Also referred to as call credit, the principle is similar to that of the overdraft facility. The bank offers a certain amount that you are free to dispose of. You can borrow money, pay it back in part or in full, and borrow again. Unlike an overdraft facility, a credit line can also be requested at a foreign bank and operates independently of the checking account. There are differences when it comes to repayment. Some providers require a minimum monthly payment with a small percentage of the money borrowed, while others give you complete freedom.

Advantages: With a line of credit, you remain completely flexible. If you don’t have any cash to pay back, just wait. Interest rates are lower than they are with an overdraft facility, but higher than with an installment loan. It only accumulates for money already deposited in your account, not for the entire line of credit. There is usually no minimum amount to be called. If you pay the full amount, no compensation is due.

Negatives: Great flexibility is also the biggest drawback. The longer the repayment delay, the higher the cost of the loan. Consumer advice centers caution against using the on-demand loan as well as the overdraft facility because both loans operate with no term or only limited repayment. Those who are not disciplined run the risk of losing control of their debt. The interest rate is also not fixed. With the ECB’s ultra-loose interest rate policy coming to an end, there is a high probability that interest rates will rise in the summer.

* We use affiliate links in this post. If you purchase a product through these links, we receive a commission from the seller. There are no additional costs for you. Where and when to buy a product is of course up to you.

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