Overdraft: the expensive loan that no one negotiates and few know how much it really costs

‘Bank Credit Line’ is a pleasant definition for one of the most expensive loans; almost no one knows its terms and they are certainly not negotiated.

Is there a chance your account will become overdrawn? Pay a commission.

Have you changed banks? One of the first thing they will ask you to do is sign an agreement allowing the bank to provide you with a credit line. This gives you the right to overdraw on  our account. All it takes to convince you to sign this agreement is a slight notion that you may become overdrawn. If you do not sign and go into the red, you will immediately be charged with high interest rates. The bank will require you to cover the deviation and may not honor transactions you have made such as writing checks, standing orders and paying by credit cards. For this theoretical right to become overdrawn, banks charge a fee of 50 to 100 shekels a year – Credit Line Fee.

Do you have any idea how much an overdraft costs?

According to CBS surveys, two out of five households are in the red at least once a year. One in five households is in the red almost constantly and the average minus is 25,000 shekels, as can be seen in the following article:

https://www.ynet.co.il/articles/0,7340,L-5585269,00.html

Are customers aware of the interest rates they pay on their overdraft? According to a survey we conducted, 69% of respondents do not know how much interest they pay for the “right” to be in the red.

16% of respondents are convinced the interest rate is at most 5%, and only six percent of respondents were accurate when they stated that the interest rate on an overdraft is around 10% and more.

These interest rates may be alarming, but when translated into numbers they are even more so: for example, a fixed minus of ILS 25,000 will cost about ILS 192 a month or ILS 2345 a year. Think about what you could buy for that amount.

Want to know how much your overdraft is costing you? Enter the following calculation tool:

https://haotzarsheli.mof.gov.il/Calculators/Pages/Minus.aspx

And what happens if you exceed your credit line?

In the event you exceed your credit line, the interest rate “jumps” from a range of 8%-12% up to a range of 12%-14%. The bank will demand you cover the debt and may delay future charges such as checks, standing orders and credit card charges. Not a good situation to be in at all.

As mentioned, unlike a regular loan – other than setting the amount of the credit line – most banks will not negotiate the interest rate with you. In principle, you can try to demand discounts, but few do so in practice and many, as mentioned, have no idea what interest rate they are paying, so they do not even think about trying to negotiate it.

Bottom line: being in the red, an overdraft, exceeding the credit line – this is one of the bank’s most expensive loans, almost no one negotiates it, most customers are not aware of its costs and it imparts a sense of not being in control.

How do you cover an overdraft?

It is important you check exactly how much the deviation from your credit line is costing you. Contact the bank and find out what interest rate you are paying on your overdraft and go out and get competing offers from other banks. Examine the possibility of closing the deficit with a personal loan for which the interest rate is cheaper. If you have a zero-interest deposit in the bank, you should check whether it is worth opening it to reduce the expensive overdraft.

Our goal at First Digital Bank is to help you get out of the red by better managing your money. Even if you have no choice but to spend more than you earn, we will ensure fair and transparent pricing and present more attractive alternatives.