Consumer credit: loans under the radar
Consumer credit does not always look like a loan, but a bank overdraft, credit transaction and revolving credit are all forms of debt—and sometimes among the most expensive. This page explains the common types of credit, compares their costs and risks, and shows how to use them in a planned way without entering a cycle of debt.
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When we think of a loan, we imagine a meeting at a bank. In practice, many of us borrow every time we enter an overdraft or spread purchases through a credit transaction. This page examines the different types of consumer credit, explains why an overdraft may be your most expensive loan, and shows how to manage credit cards without 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..
Bank overdraft
An overdraft is effectively a loan with no end date. It is readily available and convenient, but its price is among the highest in the market.
- The cost: Overdraft interest is usually in the double digits and may reach 12% or more.
- The trap: Because an overdraft can feel like a natural part of the account, it is easy to forget that it is debt that may cost hundreds or thousands of shekels a year in interest alone.
Example
If an account is overdrawn by NIS 10,000 and the interest rate is about 12% a year, the result is an annual payment of about NIS 1,200 for interest alone.
Because of its high cost, a continuing overdraft can become a significant expense over time.
A loan to cover an overdraft: solution or temporary patch?
Because overdraft interest is high, some people take 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. it.
Advantages and disadvantages
| Advantages |
|---|
| Interest on an ordinary bank loan is significantly lower than overdraft interest, and repayment becomes orderly and fixed. |
| Disadvantages |
|---|
| If spending habits do not change, the overdraft will returnThe profit (or loss) from an investment over a certain period, usually expressed as a percentage of the original amount invested.—and then you may have both an overdraft and a monthly loan repayment. |
| Advantages | Disadvantages |
|---|---|
| Interest on an ordinary bank loan is significantly lower than overdraft interest, and repayment becomes orderly and fixed. | If spending habits do not change, the overdraft will returnThe profit (or loss) from an investment over a certain period, usually expressed as a percentage of the original amount invested.—and then you may have both an overdraft and a monthly loan repayment. |
Before taking a loan to cover an overdraft, also examine other solutions such as reducing expenses or increasing income.
Credit transactions
It is important to distinguish between two ways of spreading credit-card payments:
- An ordinary installment purchase: The merchant bears the financing cost. You divide the price into interest-free payments, often up to 12.
- A credit transaction: The credit-card company spreads the payments and charges interest, often at a very high rate.
Before choosing a credit transaction, carefully check the interest rate and total cost. Decide whether it is truly worthwhile or merely a convenient but expensive way to postpone payment.
The Bank of Israel publishes monthly information on the cost of credit transactions.
Revolving credit
Under this arrangement, you set a ceiling for the monthly card charge. Any amount above the ceiling moves to the following month with added interest.
Advantages and disadvantages
| Advantages |
|---|
| Cash-flow flexibility during difficult months. |
| Disadvantages |
|---|
| A debt snowball. Revolving-credit interest is among the highest in the financial system and can make purchases far more expensive than their original price. |
| Advantages | Disadvantages |
|---|---|
| Cash-flow flexibility during difficult months. | A debt snowball. Revolving-credit interest is among the highest in the financial system and can make purchases far more expensive than their original price. |
Example
If the maximum monthly charge is set at NIS 10,000 and you make purchases totaling NIS 13,000, only NIS 10,000 will be charged this month. The remaining NIS 3,000 will move to the following month with added interest.
Regular use of revolving credit can become an expensive debt that rolls from month to month. It should therefore be used only in exceptional cases and with great caution.
The Bank of Israel publishes monthly data on credit-card borrowing costs so you can understand how much postponing payment really costs.
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 meeting payments can help you receive a lower interest rate.
- Stability: Regular income and collateral can improve your bargaining position with the bank.
- The loan amount and repayment period.
The Bank of Israel publishes monthly data on the interest charged by banks and credit-card companies on loans. Use the Loans and credit section to compare your options.
Comparing types of borrowing
| Type of credit | Typical interest level | When is it appropriate? | Main risk |
|---|---|---|---|
| Bank overdraft | Very high, usually double-digit | A very short bridge of a few days until salary arrives | Turning high interest into a fixed expense that is difficult to track |
| Ordinary bank loan | Medium, depending on the customer's profile | Financing large, planned purchases such as a car, renovation or studies | A long-term commitment that may burden monthly cash flow |
| Credit transaction on a card | High | When a large purchase must be divided and the merchant does not offer ordinary installments | Interest that is significantly more expensive than an ordinary bank loan |
| Revolving credit | Very high | Extreme situations in which the monthly charge must be reduced once | A debt snowball that grows each month through 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. |
| Ordinary merchant installments | No interest | Dividing the burden of large purchases at no additional cost | The illusion of available money, which can lead to overspending and loss of budget control |
Frequently asked questions
Should every supermarket purchase be divided into installments?
Definitely not. Installments are intended for large, one-time purchases such as a refrigerator. Using them for routine expenses creates an illusion of available money and makes the real budget harder to track.
What is the typical interest rate on an overdraft?
The rate varies between banks and customers, but it is often around 10%–14%. At 12%, every NIS 1,000 of overdraft costs about NIS 120 a year in interest.
Summary
Consumer credit is like medicine: it helps when needed, but overuse creates dependence and is very expensive. Manage it by turning hidden credit—overdrafts and credit transactions—into visible, planned borrowing, and remember that the best loan is the one you did not need to take.