Tolerated Overdraft: Definition, Legal Classification, and Legal Consequences
Definition of Tolerated Overdraft
A tolerated overdraft (also referred to as a “tolerated account overdraft”) describes, in banking and credit law, the situation where an account holder overdraws their account beyond the available balance or the agreed overdraft limit, and the bank in fact tolerates this overdraft, without there being any prior explicit or tacit agreement on a credit facility.
In contrast to the agreed overdraft facility (granted overdraft), which is based on a contractual agreement, the tolerated overdraft is a temporary and revocable by the bank at any time form of credit, where the account is overdrawn without a prior credit agreement.
Legal Basis for Tolerated Overdraft
German Civil Code (BGB)
The legal basis for the tolerated overdraft is found in § 505 BGB (“Credit Agreements with Consumers on Overdraft Facilities”). The law here distinguishes between the agreed overdraft facility (§ 504 BGB) and the tolerated overdraft (§ 505 BGB). The relevant provision for tolerated overdrafts is as follows:
An overdraft of the account occurs when a bank allows a consumer to use the account beyond the available balance or an agreed credit line, without any prior agreement having been made.
Payment Services Directive and Banking Supervision Law
In addition to the provisions of the BGB, the rules of the European Union’s Payment Services Directive (PSD2, Directive (EU) 2015/2366) as well as the relevant banking supervisory regulations contained in the German Banking Act (KWG) and payment services supervision are relevant. Banks are obliged to provide information and transparency to consumers in this regard.
Information Obligations and Consumer Protection
The bank must inform the account holder no later than after the overdraft has occurred—and if the overdraft lasts for more than one month—about
- the amount of the overdraft,
- the overdraft interest rate
- incurred or accruing costs
in accordance with § 505a BGB. The obligation to provide regular information serves consumer protection and ensures transparency regarding the interest burden and any fees incurred.
Differences from Agreed Overdraft (Overdraft Facility)
A significant difference lies in the fact that an agreed overdraft is based on a contractual agreement between the account holder and the bank, which sets a specific credit line (overdraft limit) in advance. Usage beyond this limit requires no further consent from the bank as long as the limit is observed. In the case of a tolerated overdraft, however, no explicit agreement is made; only the actual drawing on the account beyond the available funds is temporarily accepted (“tolerated”) by the bank.
Interest and Costs
Interest Rate for Tolerated Overdraft
The calculation of the interest rate for a tolerated overdraft is independent and separate from the usually lower agreed overdraft interest rate. Banks typically charge a significantly higher interest rate for the use of a tolerated overdraft, whereby they are legally obliged to provide clear information about the applicable interest rates. Interest is calculated on a daily basis on the overdrawn amount from the first day of the overdraft.
Fees and Other Costs
In addition to overdraft interest, further costs may be charged by the bank in the form of processing fees or flat-rate charges. However, such costs must be expressly contractually agreed upon and be shown transparently. Exaggerated or hidden fees are subject to strict judicial scrutiny and may be ineffective if in doubt.
Contractual Relationship and Repayment Terms
Establishment of the Contractual Relationship
A tolerated overdraft does not result in a formal credit agreement; rather, it is based on an actual usage relationship. The bank can revoke the tolerance of the overdraft at any time and demand immediate repayment of the overdrawn amount. Both the bank has a right of repayment and the account holder is generally obliged to repay without a special notice period.
Termination and Revocation
The bank is entitled to withdraw permission for the overdraft at any time and insist on the account being balanced. Revocation of the tolerance can be made without notice or with very little notice, which is why tolerated overdrafts are considered a particularly short-term form of credit.
Obligations of the Bank
Information Obligations
In addition to the aforementioned obligation to inform the customer promptly after and during an overdraft, further duties exist:
- Clear and timely notification of changes in interest rates and any applicable fees
- Provision of clear information about the legal consequences of further overdrafts
Abuse Prevention and Balancing of Interests
Banks must monitor account movements and may only tolerate an overdraft in exceptional cases and considering the account holder’s ability to pay. Additionally, tolerance is only permissible if there are no serious doubts about the account holder’s creditworthiness or ability to pay.
Legal Risks for Account Holders
Overdraft Limits and Impact on Creditworthiness
The ongoing or repeated use of a tolerated overdraft can lead to negative credit ratings (for example, by credit agencies such as SCHUFA). Even a short-term exceedance can be seen as a sign of a strained liquidity situation.
Repayment Obligation and Default
The overdraft is intended for immediate, short-term repayment. If the account holder does not promptly repay and falls into default, additional interest claims, reminder fees, and enforcement measures (e.g., account termination, debt collection) may arise.
Tax and Insolvency Aspects
Interest incurred on tolerated overdrafts is generally not tax-deductible for private account holders. In the event of an account holder’s insolvency, the claim from a tolerated overdraft constitutes an insolvency claim and must be correspondingly considered in the insolvency proceedings.
Current Developments and Case Law
Consumer-Friendly Case Law
Case law attaches great importance to the clarity of a bank’s general terms and conditions (GTCs) and their transparency for consumers. In the past, various clauses regarding overdraft interest and charges have been declared invalid if they were formulated non-transparently or were deemed unreasonably disadvantageous to the customer (including German Federal Court of Justice (BGH), decision of 25 October 2016 – XI ZR 9/15).
Regulatory Efforts
At the EU and national levels, there are ongoing efforts to limit overdraft interest rates and strengthen consumer protection, for example by setting interest rate caps and extending monitoring obligations for banks.
Literature and Further Sources
- German Civil Code (BGB), §§ 504 to 505a
- Payment Services Directive (PSD2), Directive (EU) 2015/2366
- German Banking Act (KWG)
- Federal Court of Justice (BGH), various rulings on banking fees and overdraft charges
Summary: The tolerated overdraft constitutes, under German banking law, a short-term, revocable at any time form of credit that arises without prior arrangement with the bank. It must be strictly differentiated from the overdraft facility and carries an increased risk of significant interest and cost burdens for the account holder. Extensive information, transparency, and protection obligations on the part of the banks are intended to prevent abuse and over-indebtedness. Both banks and account holders should be familiar with their respective rights and obligations concerning tolerated overdrafts in order to avoid financial disadvantages.
Frequently Asked Questions
Is a tolerated overdraft legally binding or merely a temporary tolerance by the bank?
Legally, a tolerated overdraft is not a separate credit agreement but rather a temporary tolerance of account overdrawing by the bank. The legal basis is § 505 BGB, which regulates the special provisions for overdraft credit. However, a tolerated overdraft is only a short-term tolerance of exceeding the balance without a prior credit limit agreement. The account holder has no legally binding claim to a permanent or renewed overdraft. The bank can withdraw the tolerance at any time and is entitled to demand immediate repayment of the overdrawn amount. It is advisable to review the bank’s general terms and conditions, as these often contain explicit provisions on the conditions under which overdrafts are accepted or reclaimed.
Are special mandatory information requirements to be provided in the case of a tolerated overdraft?
Yes, according to § 504 BGB and the requirements of the Payment Services Supervision Act (ZAG), banks are obliged to fulfill certain information requirements also for a tolerated overdraft. This includes, in particular, that the account holder must be informed, at the latest within one month of the occurrence of the overdraft, about the overdrawn amount, the debit interest rate, any incurred fees, and the repayment modalities. This information obligation applies regardless of whether the overdraft is caused by a deliberate transaction or by automatic debits (e.g., direct debits). The bank must also inform the customer of the applicable cost arrangement should the overdraft continue.
To what extent is the account holder obliged to balance the tolerated overdraft?
The account holder is legally obliged to promptly repay the overdrawn amount. Since there is no explicit credit agreement, the bank’s claim for repayment is due immediately, or at the latest at the next possible time that the account receives a credit. It is irrelevant whether the overdraft occurred accidentally or intentionally; what matters is that the account holder has no right to maintain the overdraft and must avoid transactions beyond the balance. If the account is not settled promptly, the bank may charge reminder fees and default interest until repayment and may even terminate the account.
In which cases may the bank refuse or revoke a tolerated overdraft?
The decision to tolerate an overdraft is at the discretion of the bank. Legally, the bank is never obliged to allow an overdraft unless an overdraft facility has been expressly agreed upon. Even if the bank has tolerated an overdraft in the past, it can revoke this tolerance at any time without stating reasons. In particular, in the case of deterioration of the account holder’s creditworthiness, irregularities in payment behavior, or other serious circumstances (e.g. attachments, account freeze), the bank can end the overdraft immediately. In addition, a general internal bank or statutory change may result in overdrafts not being tolerated in the future.
What legal consequences may arise from prolonged or repeated use of a tolerated overdraft?
If the account is repeatedly or over longer periods overdrawn, this can lead to various legal consequences. The bank is entitled to terminate the account without notice if it considers the continuation of the business relationship to be unreasonable, especially if the customer does not promptly settle the overdrawn amount. Furthermore, prolonged overdrafts can negatively impact the account holder’s credit rating; relevant reports to SCHUFA and other credit agencies are legally permissible. If there are doubts about the customer’s ability to repay, the bank may also initiate further steps, such as initiating dunning proceedings or enforcement measures.
Is there a statutory maximum limit for tolerated overdrafts?
There is no express statutory maximum limit for the amount of a tolerated overdraft. In practice, the upper limit is determined by the bank’s internal risk management and the individual customer relationship. However, banks may define certain maximum amounts for tolerance in their general terms and conditions or price lists and reserve the right to demand payment of the outstanding amount without notice if exceeded. The decision on a maximum limit is thus at the bank’s proper discretion, within the bounds of statutory duties of care.
