Consumer Credit: Under-the-Radar Loans
Consumer credit does not always look like a loan, but bank overdrafts, credit card transactions, and revolving credit are debts in every sense—and sometimes among the most expensive. This page covers common types of credit, compares their costs and risks, and explains how to use them in a planned way without falling into a debt cycle.
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When we think of a loan, we imagine a meeting at the bank. But in practice, most of us take out loans whenever we go into overdraft or split purchases into "Credit" payments. In this chapter, we will analyze the different types of consumer credit, understand why overdraft is your most expensive loan, and learn how to manage credit cards properly to avoid paying double-digit interestThe "price of money" – the amount paid for the use of someone else’s money, as income to the depositor or as a cost to the borrower. rates.
Bank overdraft
An overdraft is essentially a loan with no end date. It is readily available and convenient credit, but its cost is among the highest on the market.
- Cost: Interest on an overdraft is usually in the double digits (and may reach 12% or more).
- The catch: Because an overdraft seems like a natural part of our account, it is easy to forget that it is debt that costs us hundreds or thousands of shekels a year in interest alone.
For example
If the account is overdrawn by 10,000 NIS and the interest rate is about 12% per year, this means paying about 1,200 NIS a year in interest alone.
Because of its high cost, a prolonged overdraft can become a significant expense over time.
A loan to cover an overdraft: solution or band-aid?
Because of the high interest on overdrafts, some people choose to take out a loan to coverA contract under which an insurance company undertakes to compensate the insured in the event of damage in exchange for a periodic payment. their overdraft.
Advantages and disadvantages
| Advantages |
|---|
| Interest on a regular bank loan is significantly lower than interest on an overdraft, and repayments become structured and fixed. |
| Disadvantages |
|---|
| If you do not change your spending habits, the overdraft will recur—and then you will find yourself with both an overdraft and a monthly loan repayment. |
| Advantages | Disadvantages |
|---|---|
| Interest on a regular bank loan is significantly lower than interest on an overdraft, and repayments become structured and fixed. | If you do not change your spending habits, the overdraft will recur—and then you will find yourself with both an overdraft and a monthly loan repayment. |
Therefore, before taking out a loan to cover an overdraft, it is also worth considering other solutions, such as reducing expenses or increasing income.
Paying in Credit installments
It is important to distinguish between two types of installment plans on credit cards:
- Regular installment transaction: The merchant absorbs the cost. You split the price without interest (usually into up to 12 installments).
- Credit transaction: The credit card company spreads out the payment for you and charges interest for doing so (usually very high).
Therefore, before choosing a Credit plan, it is important to carefully check the interest rate and the total cost of the transaction, and consider whether it is truly a worthwhile solution or merely a convenient but expensive way to defer payment.
The Bank of Israel publishes the monthly cost of Credit financing so you know how much you are paying.
Revolving credit
This is a mechanism in which you set a "cap" on your monthly charge. Anything above that cap is carried over to the following month with interest.
Advantages and disadvantages
| Advantages |
|---|
| Cash-flow flexibility during tight months. |
| Disadvantages |
|---|
| A "snowball" of debt. Interest on revolving credit is among the most expensive in the financial system, making your purchases much more expensive than their original price. |
| Advantages | Disadvantages |
|---|---|
| Cash-flow flexibility during tight months. | A "snowball" of debt. Interest on revolving credit is among the most expensive in the financial system, making your purchases much more expensive than their original price. |
For example
If the maximum monthly charge is set at 10,000 NIS and you make transactions totaling 13,000 NIS, only 10,000 NIS will be charged this month, while 3,000 NIS will be carried over to the next month with interest.
Therefore, regular use of revolving credit can become expensive debt that rolls over from month to month, so it is recommended to use it only in exceptional cases and with great caution.
The Bank of Israel publishes monthly data on the cost of credit card credit, enabling you to understand how much deferring payment and spreading it into installments really costs you. We have compiled the data for you on a dedicated comparison page.
Bank loan
This is the most familiar and structured type of loan. Its terms are determined by your "borrower profile":
- Credit rating: A history of making payments on time will give you a lower interest rate.
- Stability: A steady income and collateral help when negotiating with the bank.
- Loan amount and repayment period.
The Bank of Israel publishes monthly data on the interest rates banks and credit card companies charge on loans. We have compiled the data for you on a dedicated comparison page, so you can easily compare the different institutions.
Comparison of loan types
| Type of credit | Interest rate level (average) | When is it appropriate to use? | Main risk |
|---|---|---|---|
| Bank overdraft | Very high (double-digit) | A very short bridge of a few days until the salary is deposited. | Turning high interest into a fixed expense that is difficult to track. |
| Standard bank loan | Medium (varies by customer profile) | Financing large, planned purchases (a car, renovation, or education). | A long-term commitment that may burden monthly cash flow. |
| Credit card transaction | High | When a large purchase must be spread out and the merchant does not offer regular installments. | Interest is significantly more expensive than on a standard bank loan. |
| Revolving credit | Very high | Extreme hardship situations in which the monthly payment must be reduced as a one-time measure. | A “snowball”: the debt grows month after month due to compound interestA situation in which the returns accumulated on an investment are reinvested and generate additional returns themselves, creating accelerated growth of the money over time.. |
| Regular installments (at the merchant) | Interest-free | Spreading the cost of large purchases at no additional charge. | The illusion of “available money,” leading to overspending and loss of budget control. |
Frequently asked questions
Should every supermarket purchase be spread into installments?
Absolutely not. Installments are intended for large, one-time purchases, such as a refrigerator. Using installments for ongoing expenses creates an illusion of available money and makes it harder to track the real budget.
What is the average interest rate on overdrafts today?
Interest rates vary between banks and customers, but are usually around 10%-14%. This means that for every 1,000 shekels of overdraft, you pay about 120 shekels a year to the bank alone.
In summary,
Consumer credit is like “medicine”: it helps when needed, but overuse creates dependence and is very expensive. The right way to manage it is to turn “hidden” credit (overdrafts and credit card transactions) into visible, planned credit, and remember that the best loan is the one you did not need to take.