Disposition Credit and its use
The disposition credit is an overdraft facility approved by a bank on a customer’s current account. Within this particular framework, the customer may freely dispose of the transferring capital. Partial dispositions are possible and repayment is flexible and discretionary, as long as you are within the framework.
The amount of available framework is usually based on income. Often, the appropriate framework is considered to be three times the monthly net salary.
The underlying interest rate for a disposition credit is calculated on a daily basis and charged to the corresponding account on a monthly basis. Usually, the interest rate is reported per annum (pa), ie per year. The annual statement and monthly billing can often cause confusion for consumers, so here’s an example.
Example of using the disposition credit
Assuming the interest rate of a disposition credit is 15% pa and the account balance is 0 euros. Now there is an order of 100 Euro on 1.1. and the balance is -100 Euro.
Tip: If you want to calculate the interest on a daily basis, you can use the following formula. Subled sum * Rate of interest / 100/360 = interest per day
For the above example:
100 euros * 15/100/360 = 0.04 euros. For the use of the disposition credit in the amount of 100 € so you pay 4 cents interest per day. If there is no further disposal, interest will be charged at the end of February of 1.25 euros, which will be charged to the account.
Let’s assume the whole year nothing happens in the account. At an interest rate of 15% per annum to 100 euros would be exactly 15 euros interest, but only with annual billing. Since disposition loans are settled monthly, interest rates are as follows:
On 1.1. the account balance is -100 Euro and on the 1.2 the settlement of the accrued interest occurs. As described above, 1.25 Euro debit interest accrue to the account.
The balance on 1.2. is thus -101.25 euros. Now, in February, the interest will be calculated on this sum, which is higher than the sum in January. It fall for February 1.27 euros, although no more money has been. If you run the series until the end of the year, the interest amounts to 20.48 euros instead of 15 euros. This circumstance is also known under the name compound interest effect. However, this supposed disadvantage of day-specific calculation and monthly billing is advantageous for shorter disposals.
Advantages and disadvantages of the disposition credit
If you do not use the disposition credit, there are no costs. Should the disposition credit be regularly or prolonged exploited, this can also have a negative effect on the credit rating. Due to the high interest rate and the compound interest effect, rescheduling into a fixed personal loan is often advisable in the case of intensive exploitation, as it not only offers cheaper interest rates, but can also help many people with a fixed monthly repayment.
Some banks allow an order on the agreed Dispo. It is then an overdraft and there are higher interest rates on the amount above the discretionary credit.