Credit line

The financial leeway available to a borrower at their lending institution is defined as a credit line or credit facility. Because this credit line can be used again after repayment, it is also referred to as a revolving credit. The borrower is free to decide whether or not to use the credit line granted to them.
Credit lines for private customers are commonly called overdrafts. The umbrella term current-account credit (Kontokorrentkredit) does not refer only to the private overdraft but also includes credit lines used for business purposes that serve payment transactions.

The overdraft

The overdraft (commonly: overdraft facility) was introduced in 1968 and provides a way to intentionally overdraw private current accounts up to the upper limit indicated by the credit line. The overdraft thus allows withdrawals even without a positive balance. However, if there is no credit line, a current account must generally be kept with a positive balance.
Overdrafts in the narrow sense are account usages that the bank has allowed even though the current account did not have a sufficient balance or an adequate credit line at the time the payment transaction was made. For this reason, these are also referred to as bank‑"tolerated" account overdrafts.
A customer cannot derive a right to be granted a credit line from the bank's toleration of an overdraft. If an adequate credit line is not available, the execution of a payment transaction ordered by the customer is at the discretion of the lending institution.

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Overdraft conditions

The maximum amount or upper limit of the credit limit is determined by lending institutions using extensive data pools and scoring systems. Information from credit reporting agencies such as Schufa Holding AG (Schutzgemeinschaft für allgemeine Kreditsicherung) is included in the decision to grant a credit line.
The overdraft is a consumer loan; however, the provisions of § 492 (consumer credit agreements) and § 495 BGB (right of withdrawal information) do not apply. Legally, the bank's loan offer is accepted by the actual utilization by the customer, whereby the credit line comes into effect as a loan agreement under § 488 BGB.
If no costs other than interest are incurred for the use of the credit line (facility) and the interest is charged quarterly or at longer intervals, the lending institution or creditor only needs to inform its customers before the first use about the loan ceiling (credit line) and the current lending interest rate, as well as about the procedure for interest rate changes and contract terminations. Credit lines are granted only to customers who are of legal age. Partially legally capable children and adolescents can only hold a current account on a credit balance basis. They have no credit leeway, regardless of any upper limit – since they do not yet receive a regular salary. 

Bank requirements for the overdraft

By setting the credit line, the bank determines the upper limit up to which it is willing to allow account withdrawals by the customer (borrower). A prerequisite for an overdraft credit line is that regular incoming payments are recorded on the current account. These can be, for example, wage and salary payments (salary deposits), pensions or maintenance payments, which should be regularly credited to the account so that a credit facility can be granted.
Depending on the bank, the credit line is often set at two to three times the amount of the incoming payments. Normally, no collateral is agreed for the overdraft, i.e. it is a special type of loan – the so‑called unsecured loan (Blankokredit).
A permanent and steadily increasing use of the entire credit line, referred to as "freezing" if the utilization remains at a high level for more than six months and interim repayments via incoming payments do not occur, is to be avoided. The customer should be able, for example through salary payments, to repay the utilization to the lender within a few months.

Interest charged on the overdraft

The calculation of debit interest for the use of the credit line is based on the daily utilization. If the credit line for the overdraft is exceeded, additional overdraft interest is charged. Typically, the customer's account is debited with the loan interest quarterly.
The interest rate is variable and is oriented to the market interest level. Compared to other types of credit, the interest rates of an overdraft are quite high. If credit utilization is expected for a longer period, a rescheduling into a usually cheaper installment loan should be considered.

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Termination of an overdraft credit line

According to the general terms and conditions, ordinary termination is possible with a thirty‑day notice period. In the event of significant changes in income and asset circumstances, a special notice period does not have to be observed according to §§ 488 and 489 BGB if the repayment of the loan is endangered. With such an extraordinary termination of the credit line, the loan amount becomes due immediately.

Credit lines for business customers

Business customers in particular receive credit lines for various credit purposes. Business customers are sometimes charged a fee in the form of commitment interest (Bereitstellungszinsen) if they do not fully utilize an existing credit line (or the credit facility or credit limit).
This is because, under the Banking Act, banks must also back the parts of the credit lines they have granted but which are not utilized with their own capital, provided the original term of these credit lines is greater than one year and the bank has no immediate right of termination.
The bank’s costs for tying up equity capital are passed on to customers via the commitment interest. For this reason, credit lines are often granted only "until further notice" (b. a. w.) in order to avoid tying up equity capital.

Credit lines for special types of credit

Credit lines are also granted for special types of credit, such as the aval credit. "Aval credit" is, by definition, a generic term for guarantees, sureties, warranties or bill endorsements undertaken by the bank on behalf of the customer.
The credit line in a trade credit insurance indicates up to which amount supplier credits are insured that a supplier grants to its customers. Trade credit insurance protects the supplier against customer payment defaults up to the credit limit.