Around six million Germans are in the red on their accounts. This could become significantly more expensive in the future if the European Central Bank (ECB) raises the key interest rate in July. In order to save costs, customers have to become active themselves and look for cheaper banks.
Inflation in Germany has not been as high as it is now for a long time: the inflation rate was 7.9 percent in May 2022. In order to slow down the increase, the European Central Bank (ECB) must react soon. ECB boss Christine Lagarde has already hinted at this recently. If they raise interest rates as early as July, that may slow inflation, but for around six million Germans whose checking accounts are in the red, that would be poison. Because the overdraft interest could then increase again. “Currently, banks charge an average of 9.43 percent overdraft interest. If the key interest rate were increased to 0.25 percent or later even to 0.5 percent, the overdraft interest could rise to an average of around eleven percent,” says Alexander Artopé, managing director of the credit portal Smava. “That’s how much overdraft facilities cost the last time the key interest rate was 0.25 to 0.5 percent.”
Consumer advocates have been denouncing the high interest rates for years. In 2014, the Bundestag discussed capping overdraft interest. “Nothing has happened to date,” says Artopé.
Depending on the bank, the amount of the overdraft interest is usually based on the ECB key interest rate or the so-called three-month Euribor. This is the interest rate at which banks lend money to each other (Euribor stands for Euro Interbank Offered Rate). In the past, this developed in a similar way to the key ECB interest rate. For July 2022, the ECB committee has announced an increase in the key interest rate.
If the key interest rate is increased, the banks that align their conditions to the key interest rate will also increase the overdraft interest. The same applies to the banks, which align their interest rates on the three-month Euribor, since this interest rate has always behaved similarly to the key interest rate in the past. If you want to avoid this impending increase in overdraft interest, you have to act and look for a cheaper alternative: This can be a bank with a lower overdraft interest. But there is also another alternative.
“As soon as it becomes apparent that I won’t be able to balance my account within two, maybe three months, I should be realistic and switch to a cheaper alternative. This can be an installment loan, for example,” advises Smava Managing Director Artopé. An installment loan costs around 5.5 percent interest on average across Germany and is therefore around 42 percent cheaper on average than the overdraft facility. Installment loans are even significantly cheaper via a loan portal. The loan interest rates offered here are well below four percent on average. In contrast to the overdraft facility, the interest on the installment loan is also fixed for the agreed loan term. No matter how the ECB base rate and the three-month Euribor change: installment borrowers always pay back their debts at the agreed interest rate.
According to a Civey survey commissioned by Smave, an average of 8.7 percent of Germans have a negative account; that’s around six million customers. They pay high interest for it. Because an overdraft is one of the most expensive ways to borrow money, checking accounts should only be overdrawn for a short period of time. 74.8 percent of overdraft users do the same and balance their account within up to 3 months.
On the other hand, a quarter of the users (25.2%) need significantly longer; sometimes up to a year or more. Until the account is balanced, they currently pay an average of 9.43 percent interest. That is an unnecessary amount of money that can easily be saved, for example by switching from an overdraft facility to an installment loan.
All data shown comes from a survey for which Civey GmbH interviewed more than 2500 people aged 18 and over on behalf of Smava. (Status: 05/15/2022). The results are representative of the population in Germany aged 18 and over. Extrapolations were made on the basis of the statistics “Provision of the population” of the Federal Statistical Office as of December 31, 2020.
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