Model an instalment loan or an overdraft

Overdraft interest is calculated in simplified form on a constant amount. In reality the balance fluctuates; the calculator therefore only shows the order of magnitude.

What is calculated here

The overdraft side uses a simple calculation: amount × interest rate × period in years. So 3,000 euros at 12.5 % over twelve months comes to 375 euros in interest. It assumes the amount stays drawn at the same level throughout, and no interest is compounded. The loan side uses the same annuity formula as the other calculators and shows only the interest portion, so that both sides measure the same thing: pure interest cost.

The comparison is lopsided — in the loan’s favour

This needs saying openly: at the end of the term the instalment loan is repaid, while the overdraft is still outstanding in full. The loan cost less interest because the outstanding balance fell month by month — not only because its interest rate was lower. A fair comparison is therefore not “loan or overdraft”, but “repay to a plan or stay in debt indefinitely”. If you clear your overdraft within a few weeks anyway, you don’t need a loan. If you have been carrying it at a similar level for months, you are really comparing two very different things.

• Instalment loan: repaid at the end
• Overdraft: still fully outstanding at the end
• The loan’s interest advantage also comes from repayment
• Short overdrafts remain more practical on the overdraft

Two simplifications on the overdraft side

First: a real overdraft is charged on the actual daily balance, and interest is usually debited quarterly — so it compounds as soon as it increases the balance. Our model calculates linearly and therefore tends to come out slightly too low. Second: overdraft interest is variable. It can change during the period, and the model does not forecast that. The current rate is shown in your account terms or in your bank’s list of prices and services (Preis- und Leistungsverzeichnis); the Deutsche Bundesbank reports overdraft and instalment loan rates separately in its interest rate statistics.

When the overdraft is permanently maxed out

An overdraft that hasn’t returned to zero for many months is no longer a liquidity buffer but expensive long-term financing without a repayment plan. At this point, refinancing into an instalment loan is often cheaper – run the numbers with your own figures. If, however, several debts are open at once and the repayments as a whole no longer look sustainable, the right place to go is not refinancing but free debt counselling (Schuldnerberatung). This counselling is independent and costs nothing — unlike any further loan offer.