Those who have a classic current account and do regular work generally enjoy the luxury of a so-called overdraft facility in Austria. But as advantageous as the small financial cushion may be. Once in the red, you pay dearly for the overlay frame provided by the bank. In the short term, this may not be a problem, but in the long term, overdrafting can quickly end in a debt trap. So what should you watch out for and how can you avoid the debt trap overdraft facility?
The overdraft frame – a much used bridging option
The overdraft facility (also known as the overdraft facility ) is a way granted by the banks to bridge a temporary financial bottleneck. This is made possible by an upper limit set by the bank based on relevant factors – such as regular income, financial situation, age and profession – which is available to the account holder after the account balance has been used up.
An overdraft framework is:
- A surplus loan granted by the bank and tied to the account.
- A loan option that is available after granting without prior application.
- A form of credit that is granted without a KSV entry due to its special features.
Often used in everyday life and often granted automatically by banks and set up with a maximum volume of up to four times the monthly income, the overdraft framework has long been something of a “savings stocking” for those moments when the month is too long for that previously received salary. Almost every account holder has ever used the overdraft facility in their life to make spontaneous payments, pay for purchases or to bridge a financial bottleneck, and basically there is absolutely nothing to be said against using this financial opportunity.
The overdraft frame enables:
- The flexible bridging of financial bottlenecks.
- The financing of short-term debits for which the account balance is insufficient.
But banks do not grant the cover frame out of humanity and willingness to help. The aim of every bank is to generate the best possible sales and thus work economically. Accordingly, in addition to the advantages of a cover frame, there are also disadvantages that should always be considered.
Anyone who occasionally slips into the frame at the end of the month does not have to fear an entry in the directory of the KSV (Credit Protection Association), nor does he have to apply for a loan. As long as the account is balanced again at the end of the monthly accounting period, the overdraft facility is even an advantageous alternative for small loans.
However, if you use your account framework to the full every month, you run the risk of gradually falling into debt due to interest and overdraft costs. Because a consistently exhausted account framework is difficult to balance from the point of view of interest alone with monthly income from an employment relationship.
What are the costs of overdrawing your account?
Above all, it is the sometimes very high costs and interest that can arise through the use of the overdraft facility that make the account framework both a blessing and a calamity. Because if you constantly push the limits, you have to expect high interest rates and often high costs.
The most bitter truth about the overdraft facility is the interest on this financial bridging option granted by the bank. With an interest rate of 13.25 percent or even more, the account balance is truly an expensive proposition in direct comparison with small loans. In addition, there are additional fees for careless use. If the account limit is exceeded, default interest, overdraft fees or penalty fees may result.
The use of the account frame creates:
- Interest on the funds used by means of account balances
- Default interest in the event of the overdraft limit being exceeded
- Possibly. Penalty and overdraft fees
With an interest rate that is often far above the interest rates of a classic bank loan, the overdraft facility is an expensive affair. In addition, if the overdraft facility is exhausted, there is a risk of further costs in the form of default interest or overdraft fees. Detailed information on the de facto interest, fees and possible fines can be found in the bank documents or requested directly from the responsible bank.
When does debt rescheduling make sense – get out of the debt trap?
You read it again and again and many people in Austria are affected every day. The overdraft facility is fully utilized and can hardly be covered by the monthly cash receipts. Over a short period of time, this may be more or less justifiable. But every bank customer in Austria should be aware of one fact. If you overextend the overdraft framework for too long, it becomes expensive and often ends in the notorious debt trap.
The reason for this is the sometimes very impressive overdraft framework. Depending on the bank and region, up to four times the monthly income is possible. It doesn’t take a lot of math to figure out how difficult it can be to balance this sum of money, along with all the interest and fees that accrue. If you act carelessly, it can happen that you are in the lousy with several thousand USD.
Debt restructuring of the overdraft facility is advisable if:
- A timely settlement of the amount owed is not possible.
- The financial burden becomes a risk factor.
- The bank threatens to block the account and overdraft facility until the outstanding debt is paid.
What to do if that happens? That is the big question for many bank customers. Now there are quite a few options. On the one hand, you can try to balance the overdraft limit with your own financial resources as quickly as possible and thus reduce the financial burden. Unfortunately, this is not always possible. In such cases, rescheduling is often advisable. A bank loan, for example, is several times cheaper than the bank account alone in terms of the interest charge and can therefore reduce the interest charge in the long term.
Avoid the debt trap account framework – budget ahead, reschedule early!
In order not to let the account framework become a debt trap, debt advice institutions advise you to look ahead and deal responsibly with your own finances. Pay attention to your financial circumstances. Rethink planned expenses and at best try to coordinate them in such a way that it is not even necessary to overdraw your account. Because if you don’t fully exhaust your account, you are financially on the safe side.
To protect yourself from the debt trap cover frame you should:
- Always keep an eye on your finances.
- Coordinate larger expenditures so that at best they can be financed without bridging.
- Talk to your bank early on about alternatives to expensive bank accounts.
Should it happen that you use your account balance or even use it up, it is important to keep an eye on alternatives. Especially with a long-term financial need, a loan is usually always cheaper and safer for your financial situation. Get advice from your bank and find cheap and safe alternatives to permanent account usage. This saves you a lot of money and debt rescheduling is usually always possible if your bank can trust your liquidity.
In the sense, protect yourself from the debt trap overdraft facility and be sure to exchange expensive overdraft interest for cheap loan interest. Your wallet will thank you in any case!