A current account credit is the possibility to overdraft a current account for a limited period by a predetermined amount. It is granted to the owner by the bank and serves to bridge short-term bottlenecks in solvency. Therefore, it is also a way to finance a purchase quickly and easily, as long as you are able to pay it off in the foreseeable future.
The current account credit is characterized by the fact that it can be called up at any time. The owner of the current account is therefore not obliged to announce the use in advance. Current account credits are also repayable at any time, there are no installments or similar.
The current account credit is legally a loan in the sense of the German Civil Code. However, it is more flexible in terms of terms, amount and repayment options than a normal loan. The bank must guarantee that the loan amount is available at all times. At the conclusion of the contract, a limit is set which the borrower may use to the maximum. However, he is completely free to choose whether to use the full amount or only partial amounts. In both cases, the bank must ensure that the money is available and can be paid out.
Types of current account credit
- The most common form is the overdraft or short Dispo. This is a current account credit granted to private individuals for their own current account. It is very widespread and is granted to many customers by their bank. A current account credit can also be very helpful for companies. They help them to avoid short-term financing bottlenecks.
- The most common is the working capital loan. For example, companies can use this to compensate for any time lapse between payment obligations and sales receipts. A current account credit is also a useful option for companies that are very dependent on a season. If the costs are incurred before the earnings season begins, a working capital loan provides the necessary remedy.
- Another type of overdraft facility for companies is interim loans. For new projects, it can happen that the financing is theoretically secured but the money cannot yet be used. This may be due, for example, to the fact that certain home loan savings contracts are not yet available, or that equity capital may only be accessed after the investments have matured. In order to avoid delays, companies can then use an interim loan. For credit companies, this type of overdraft facility is associated with a relatively low risk, since the financing is already secured and can only be used at the current time.
- Pre-financing works in a similar way to interim loans. The big difference here, however, is that the financing of the project has not yet been secured. This can have temporal but also formal reasons. The banks run a greater risk here than with the interim loans, as the financing can still fail. Therefore, the interest rates on this type of loan are higher. Both pre-financing and interim loans are designed for an average of 1 to 2 years.
Terms and conditions
The credit limit, term, interest, purpose and any collateral are recorded in the current account credit agreement. Collateral is rarely required for simple overdraft facilities. In general, however, the higher the contractual limit, the more likely it is that collateral will be required.
Regular deposits into the account are a prerequisite for a posting control. The limit offered is usually based on this. The banks expect that a used overdraft facility will be repaid within 2-3 months. Therefore, the credit limit is usually 2-3 times the monthly deposit. The aim is to prevent long-term or steadily increasing debt through these measures.
The interest on the loans is based on the market interest rate. You only pay for the amount that is actually used and not for the credit limit. Compared to other forms of credit, they are relatively high, which is another means of preventing long-term use.
In addition to the cost of interest, overdrafts can also incur costs for credit and sales commission. The loan commission is paid for granting the loan, while the sales commission is similar to an account maintenance fee.
The contract ends upon expiry of a period or upon termination of the credit institution. In the event of termination, the loan amount is due immediately. If an amount falls due due to a deadline, this does not necessarily end the credit relationship. A tacit agreement may have been reached that continues to entitle the borrower to use the loan volume.
A limit is set for each current account credit, up to which the borrower can exhaust the loan. The limit represents the maximum amount that is available. However, if the borrower determines that the amount is insufficient, he must notify the bank and negotiate with him about the possibility of an overdraft. The bank is under no obligation to allow an overdraft that has not been agreed.
If an overdraft has been approved and it is actually used, further interest will be due for this. The overdraft interest is somewhat higher than the already relatively high current account credit interest and is intended to keep an overdraft as short as possible.
A special case is a “tolerated overdraft account”. This is the case if an overdraft has not been agreed with the bank in advance, but is nevertheless tolerated by it. If this overdraft is tolerated for a period of more than 3 months, then it is considered tacit consent to a new loan agreement. Therefore, this type of overdraft poses a risk to the banks.