Meaning of the credit line
When it comes to larger purchases, the necessary money is often not available in cash. Thanks to the many loan offers from banks and other lenders, however, this is no longer a big problem today. Such loans are particularly useful for urgent purchases or they help to fulfill one or another dream. But what options does the borrower actually have nowadays? Does it really have to be an overdraft or an installment loan?
A credit line is a loan that can be used flexibly. A maximum amount for a loan is agreed with the borrower up to which money may be drawn. It is therefore also possible to use a smaller amount than the maximum agreed.
Replacing overdrafts with a credit line
An overdraft is known to be extremely expensive. These days well over 10 percent is commonly charged, on average up to 13 percent. The overdraft is the best-known form of overdraft facilities and is associated with a checking account. However, not everyone can claim an overdraft; regular deposits into the checking account and, of course, the necessary creditworthiness help the account holder to activate it.
If you cannot meet the conditions for the overdraft, or you have already used up the overdraft, the credit line is an interesting alternative. The credit line offers the possibility to replace the overdraft, in other words it is a debt restructuring. The credit line offers far more attractive interest rates than the overdraft, in some cases around 50 percent lower. If you only want to use the overdraft once or perhaps twice, this is absolutely no problem; however, if you need this option more often or on a permanent basis, it makes sense to switch to a credit line. Although it cannot be repaid at any arbitrary point in time, in the long run it is cheaper.
The credit line as an alternative to an installment loan
An installment loan has the advantage that a purchase does not have to be paid for in a single payment, but can be paid off over a longer period of time. However, if the purchase is not very expensive, a long-term commitment to repayment and interest rates may even be disadvantageous.
For some time now there has been a middle ground that many banks have already discovered - the credit line. Provided you want to be flexible in repayment, this is another advantage of a credit line. It allows you to repay minimal amounts or a large amount, depending on how much money is available at the time. It is therefore also possible to repay the entire remaining balance at once, even if you previously only made small repayments. You do not need any further agreement with the lender for this.
The credit line is also called a call loan, which becomes clear here. However, the monthly amount to be paid must not fall below a certain minimum, while there are no limits upwards, up to full repayment. This threshold amount is contractually agreed with the lender in advance. Because you have the mentioned freedom of payment, the credit line is far more flexible than a conventional installment loan. An installment loan is paid out, whereas a credit line is merely made available. The Schufa check as well as the purpose-specific check are omitted, it is only recorded from the outset whether a credit line is granted to the borrower or not. If so, the borrower can access the amount determined by their creditworthiness at any time - the credit line is available and can be used as soon as it is needed.
Adjusting repayment to interest rate fluctuations
You can even make repayments of only two percent of the overdrawn amount per month. Some banks even offer the possibility to pay only 1.5 percent of the amount. Interest charges are added, but because these are lower than for an overdraft, the credit line offers a good alternative here. If you plan well, you can easily manage smaller purchases alongside a credit line, such as a new bed or a new TV. The only problem is that you have to keep a bit of an eye on things with a credit line. Because interest rates often fluctuate significantly. Due to the flexible repayment rates, however, any disadvantages can be offset. When the interest rate is low again, you can simply repay a large amount.
Advantages and disadvantages of a credit line
Depending on the borrower's circumstances, the credit line can even amount to over €25,000. Thus a credit line can certainly be an alternative to a conventional installment loan, even for larger purchases, such as a small car. Many people question whether such financing with a credit line is worthwhile at all, and this question can basically be answered quite simply. The interest rates for a credit line are usually below ten percent and are therefore often slightly more expensive than for an installment loan, but you can freely dispose of the funds and do not have to submit various applications first. You also have much more flexibility in repayment, as mentioned. If you use these rate fluctuations wisely and create a repayment plan, an installment loan can easily be replaced by a credit line.
Conclusion
All in all, the credit line can neither completely replace the overdraft nor the installment loan. For many, however, it can be a very good alternative and middle ground. If everything is right, you neither have to pay the enormously high interest rates of the overdraft nor file applications and be inflexible over a long period. The credit line offers a middle way. And if the lender offers this option, you should consider it if needed. You should, however, be careful about fluctuating interest rates. When interest rates are particularly low, a large sum can be repaid easily without having to arrange this separately in advance. In addition, you always have a clear view of your expenses, which is essential in financial matters.
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