Banks usually grant customers overdraft facilities when opening an account, but sometimes only on request. This is usually around one month’s salary, but can also be up to three monthly salaries. A prerequisite for the approval is flawless Credit Bureau information and, of course, regular income. The specified amount can be used freely without having to make another loan application. In addition, no repayment rates are agreed, as is the case with a regular loan. This means that there is no credit term with a first and a last installment. Even if the salary has already been spent, the bank customer can still make transfers, withdraw money at the ATM or pay for his purchases with an EC card.
Overdrafts are expensive
This sounds very positive at first and is felt by most people as additional security. If, for example, a car repair is due or a defective washing machine needs to be replaced, the bank customer still has liquid funds in reserve through the overdraft facility. However, the banks do not provide the overdraft facility for the sake of pure human love. Your goal, of course, is to make money. Loans earn banks interest, that goes without saying. Much higher interest is required for overdrafts than for regular loans: they are at an interest rate of ten to twelve percent. Once the overdraft facility has been exhausted, an even higher interest rate is charged for every dollar that exceeds the agreed overdraft facility. As long as wages or salaries are received on a regular basis, banks are very generous with their overdraft facilities for years to come.
When does the overdraft facility become a debt trap?
The debt trap snaps shut when the bank terminates the overdraft facility. Unemployment, an account attachment or negative entries with Credit Bureau are usually the reasons for the termination of a overdraft facility. In these cases, the bank is interested in getting your money back as soon as possible. In the case of an account garnishment, this means that all incoming funds are initially retained until the overdraft facility is settled. Only then, with the next incoming funds, will the amount of the attachment be transferred. Until all of this is settled, you, as the debtor, will not receive a cent, even if the procedure takes months. If the bank terminates the overdraft facility due to negative Credit Bureau entries or because of unemployment, it will, if necessary, initiate judicial dunning proceedings in order to get its money. If the bank customer is unable to pay his debts, a bailiff may visit. Under certain circumstances, this may already be the start of personal bankruptcy. For the customer, juggling starts with every cent, because after all, daily life costs money and other liabilities also have to be met. If the overdraft facility becomes a debt trap, this mostly draws wide circles, so that other areas of life are also affected by problems.
What to do if you have fallen into the overdraft facility debt trap?
General advice cannot be given here, because each case is individual. Basically, however, you should first get an overview of the overall situation and take stock. What income is available? What is the amount owed? What other liabilities are there? Are there any liabilities that are based on contracts that can be dissolved? These can be insurance contracts, for example, which are not currently required if there is a termination option. Some insurance or savings contracts can be left for a while. Debt restructuring can be a solution to the overall problem. If the total amount owed is not particularly high and you have a regular income, it is worthwhile to consult the bank about this. To do this, you actually have to be able to provide facts and figures – that’s why it’s essential to get an overview. It is important to react immediately if the situation becomes difficult. Under no circumstances should you bury your head in the sand in this situation and remain inactive, as this only worsens the situation unnecessarily.
What you should definitely not do!
Whoever is in a fix often reacts with panic. When people have their water up to their necks, they first look for ways to make money. Many consumers panic into the next debt trap, for example through dubious loan providers. It is never worth trying to get a loan somewhere in a difficult situation so that you can pay off your debts and take a deep breath. This usually creates even more problems, no matter how beautiful the promises sound. What debtors need at such moments in their lives is competent advice from people who are familiar with debt: debt counselors.
What can the debt counselor do for you?
The debt counselor will go through your overall situation with you. Seeking a debt counselor does not mean that this will inevitably lead to bankruptcy proceedings. The consultant will only recommend such a procedure if there is no other way out. Debt advisors can also draw up payment plans, arrange installment payments and make settlements. In many cases, debt counselors succeed in persuading creditors to forego excessive interest and dunning costs. This alone gives the debtor greater financial scope. Many cities and municipalities, but also welfare organizations, offer debt advice or can at least name consumers as serious contacts.