Israeli Banks Charge High Fees for Overdrafts, Study Finds

An average overdraft of 18,000 shekels (approximately $5,000 USD) in an Israeli checking account can cost consumers 2,378 shekels (about $650 USD) annually, according to a new analysis. This annual cost breaks down to roughly 200 shekels per month, primarily comprising 2,115 shekels in interest and a 250 shekel credit allocation fee.

The interest rate is calculated as the prime rate plus 7 percentage points, resulting in an annual rate of 11.75%. The prime rate itself is based on the Bank of Israel's interest rate of 3.25% plus a 1.5 percentage point margin. The credit allocation fee, set at 0.25% of the credit line quarterly, is charged on a 25,000 shekel credit line even if it is not used. Some banks may waive this fee for private accounts.

The analysis highlights that the effective annual rate can reach 13.21% for an 18,000 shekel overdraft, considering compounding interest and fees. The cost can increase significantly with longer or larger overdrafts. For instance, an average overdraft of 6,000 shekels incurs an annual cost of 955 shekels, representing a higher effective rate of 15.92% due to the fixed allocation fee.

Negotiating the spread above the prime rate is the only variable factor in the calculation, with rates ranging from 5% to over 10% depending on the customer's risk profile. This difference can amount to about 1,000 shekels annually on an 18,000 shekel debt. The study also points out that the way these charges are presented on bank statements, often as a single annual sum, can obscure the true cost for consumers.

As an alternative, taking out a loan to cover the overdraft is presented as a more cost-effective option. A 36-month loan of 18,000 shekels at 8.5% annual interest would accrue 2,456 shekels in interest over three years, compared to 7,134 shekels for maintaining the overdraft for the same period. The analysis encourages consumers to assess their actual credit needs rather than accepting the maximum credit line offered.