There are two ways to cover a low to medium financing requirement: firstly, these are loans with fixed terms and interest agreed in advance, secondly, a credit with overdraft facility can be used in a checking account. With a manageable amount, a credit with overdraft facility is often the recommended option.
The advantage of the overdraft facility: high flexibility
Many bank customers are given a so-called overdraft facility on their checking account. Up to a certain amount, these can then overdraw their account at the currently applicable interest rate. This amount can range from several hundred to several thousand dollar, the decisive factor here is the individual creditworthiness. Invoices in this range can therefore also be paid with the use of the overdraft facility; a contract for a fixed credit is then not required.
This saves red tape. In addition, consumers are not bound by fixed rates. If you have additional income or reduced expenditure, you automatically reduce the amount of the credit in the checking account. If the financial balance is unexpectedly worse, they do not fall behind in payment as with a fixed loan, but simply have a higher minus in the account.
The interest: overdraft facility versus fixed credit
Fixed-rate loans often seem to be the better alternative, since nominal interest rates are lower than for a credit with overdraft facility. However, this comparison is too short: Interested parties should bear in mind that in the case of a overdraft facility, interest does not accrue for the full amount over the entire period. Billing takes place daily. After receipt of the salary, the loan amount is at least temporarily smaller, and the interest is then charged accordingly for a smaller amount. Only in the course of the next thirty days will the sum increase again due to direct debits and cash withdrawals.
Whether a bank allows customers to overdraft is at their sole discretion. The differences are therefore great. Some banks only check existing debts and late payments via Credit Bureau. Other institutes, however, require additional proof of income over a certain period. Anyone looking for a checking account should pay attention to these requirements.