Having quickly available reserves is always a good thing. But not everyone has a lot of money on the high edge to cover unexpected costs. In such cases, a credit line, also called call credit, can be very useful if a smaller amount of money is needed in the short term. In addition, such a call credit is also a cheap alternative to the known overdraft facility.
What is a credit line?
A credit line is colloquially also called on-demand credit. From this it can be roughly derived what this form of credit is all about. With a credit line, the bank grants you a fixed credit line that you can freely use. The amount of the credit line varies, amounts between 1000 and 50,000 USD are possible.
The credit line has some parallels with the overdraft facility, but is in most cases cheaper in terms of interest.
How does a credit line work?
When the contract is concluded, the bank grants a certain credit line and sets up its own credit account for you. The framework loan is now available for an indefinite period, so it is not tied to a fixed term, unlike an installment loan. If you need a loan amount, debit it from your credit account. Only then will interest be payable on the loan, not before.
In contrast to an installment loan, a framework loan has a variable interest rate. This means that the interest is reset each time the credit line is drawn and is subject to fluctuations. In return, with a classic installment loan, you have an interest rate that is fixed for the duration of the contract. The target interest for a credit line is calculated from a reference interest rate, for example the key rate of the Fine Bank, and a previously defined premium. The amount of the surcharge is calculated from your credit rating and your monthly income. Due to fluctuations in the reference interest rate, the debit interest rate on the credit line can also change.
If you have used the loan, you can repay it flexibly.
How does the repayment work with a call credit?
A credit line can be repaid in various ways. Fixed partial amounts can be determined, which you repay on a monthly basis. Or you can pay back the loan pro rata, either based on the total credit line or the current loan amount. For this purpose, percentage values are determined in advance, which are then used for the repayment. Values between 1 and 5% are common.
An example: You have a credit line of over 10,000 USD and borrow a loan amount of 2,000 USD from it. Depending on the repayment model, you will now have different monthly installments:
- Case 1: A fixed amount of USD 100 per month was contractually agreed.
- Case 2: The monthly rate is always 2% of the total credit line. In this case that would be 200 USD.
- Case 3: The monthly rate is 2% of the current loan amount. In this case that would be 40 USD.
In addition to this installment, the corresponding borrowing rate is of course also due.
The framework credit enables a high degree of flexibility through the possibility of special repayments. In addition to the fixed installments, you can repay the loan amount early by making additional repayments. There are no additional fees for call credits. Therefore, they are significantly more flexible than normal installment loans. In such cases, early repayment is also associated with additional costs.
Requirements for a credit line
Your creditworthiness is decisive for the granting of a credit line. Banks always need collateral when lending. You must be able to demonstrate this in the application.
Above all, you must be of legal age when applying for a loan and have a permanent place of residence in Germany. The next step is your monthly income. You must be able to demonstrate regular income from self-employment or employment. In addition, the lender needs a list of your monthly payments and commitments, as well as information about existing loans. This is used to determine whether you can afford the credit line and whether it is compatible with your monthly cash flows. You also need a German current account for a credit line. This is where the loan amounts are paid out and the monthly installments are repaid.
An assessment of your credit rating by means of Credit bureau is also necessary. This check should not reveal any hard negative features, as otherwise lending will be excluded. The following negative characteristics lead to a rejection of the loan application, for example:
- Garnishment of wages or accounts
- Personal bankruptcy
- Statutory declaration
- arrest warrant
The premium on the borrowing rate of a credit line can be made dependent on your creditworthiness and your level of income. The better this check is, the cheaper the loan offer can be.
Advantages & disadvantages of a credit line
A credit line is very flexible overall. You can use the approved credit line whenever you need it. Only then will you incur costs, otherwise not. In addition, you have much more freedom in repayment than, for example, with a normal installment loan. Above all, through the option of special repayment, the repayment can be made at your own discretion and financial situation.
If you quickly repay the credit contributions of a credit line, the interest burden is also lower. This allows you to save money on this type of loan if your finances allow it. Overall, a credit line is much cheaper than an overdraft facility. With a credit line, the interest is around 5%, while overdraft interest can be between 8 and 15%.
You can individually determine the loan amounts of a credit line. You can withdraw anything that is within your credit line. In addition, the loan amounts are not tied to any purpose. So you can freely dispose of the borrowed money.
The stricter credit rating requirements could be seen as a disadvantage. The bank gives you a great deal of trust, especially with a credit line. To get this, your credit rating and collateral should be in good balance. Other disadvantages can arise if the high flexibility is used too carelessly. You should therefore only take out a credit line if you can always keep an overview of your finances. If you are unable to pay off the monthly installments, the expensive overdraft facility can quickly be used again. This can quickly lead to a spiral of debt.
Differences between credit line and overdraft facility
While the two forms of credit are quite similar from the basic model, namely that a certain credit line is granted, there are also some differences.
The main difference is in the interest that accrues. As already mentioned, overdraft rates are significantly higher than with a credit line. In addition, you do not have the option of repaying the loan amount in equal installments with a credit facility. Once used, the overdraft facility must be repaid in full, otherwise you will not be able to get out of the minus and the interest burden can increase continuously. The credit line has no direct influence on the cash flow of your checking account. So you have a better overview of the loan amount.
In addition, the framework credit is not linked to the conclusion of a current account. You can take out the call credit from another bank and still link your existing checking account to it.
Who is a credit line suitable for?
The credit line is generally suitable for anyone who is looking for a cheap alternative to the expensive overdraft facility. In addition, it is of course suitable for those who can meet the requirements already described.
Since the amounts paid out of a credit line are not tied to any purpose, it is suitable for various situations:
- To reschedule the expensive overdraft facility
- As financial emergency aid
- For the financing of consumer goods or generally smaller investments
With the latter point you should always compare exactly. A corresponding consumer loan from the retailer can be the cheaper option for buying a new television. So consider whether you would prefer to benefit from low interest rates or flexible repayment.
Ultimately, you should only take out a credit line if you have the appropriate discipline for repayment. If you continuously draw on the credit line without repaying large sums or don’t adjust to the growing monthly installments, you can quickly become over-indebted.
Framework loan or installment loan?
When answering this question, it depends on what you need a loan for. The different areas of application of the two types of loan are already clear when you look at the differences.
With an installment loan, you get the entire loan amount in one go, while with the framework loan you can always borrow a smaller amount within a certain framework. An installment loan is therefore much more static and inflexible. You receive money from the bank and have to pay it back within a set period of time. As a result, interest rates are fixed from the start and are not variable, as with a credit line. With a common installment loan, the interest accrued is generally lower.
So if you can prepare yourself for a long-term loan and want to benefit from cheaper interest rates, then you should rather resort to an installment loan. For larger loan amounts that are to be repaid over a long period, a framework loan is not really appropriate. The strengths of these are with shorter terms, less than 12 months. Especially when only a small amount of money is required, a normal installment loan cannot be realized at all. With a credit line, you have more leeway in terms of the amount paid out.
Service life of a credit line
Once approved, you can use the credit line indefinitely. Unlike an installment loan, you are not tied to a fixed term. As the term call credit already conveys, the loan is available at any time. You can therefore request a sum at any time or leave the credit line unused for a longer period. So you can always use the credit line when you really need it.
The repayment deadlines are also not so tight when the credit line is drawn. The fixed basic rates only stipulate a maximum duration until when the loan amount must be repaid. Due to the interest, however, a quick repayment is recommended, otherwise you should rather apply for a normal installment loan.
In exceptional cases, the credit agreement may be terminated. Banks reserve the right to terminate the credit line if their credit rating deteriorates. However, you have to meet contractually agreed deadlines. In the same way, you should also observe the specified notice periods if you plan to cancel the credit line yourself. Make sure that you have paid all outstanding debts by the deadline. At the end of the contract term, the credit account must be completely balanced. Remaining amounts may have to be paid back in one fell swoop. You should be aware of this when you cancel.