Overdraft fees have changed: what it means for you

An overdraft can be a useful way to borrow a little extra from the bank when you don’t have spare savings but in April 2020, the FCA found that fees for unarranged overdrafts were regularly 10 times as high as fees for payday loans and that new rules were needed. So, what are they, and how will they affect you?

Well first of all - what is an overdraft and why do we even have them? In an ideal world, you’d have a savings buffer to prepare for emergencies or a large expenditure. However, life has a way of throwing us a few curveballs. Banks offer overdrafts to assist - this is a way of borrowing from your bank through your current account. It’s a form of debt, and often comes with a fee attached.

There are two types of overdraft:

• Authorised/arranged overdraft: where you’ve pre-agreed with your bank that you can borrow up to a pre-set limit and you can spend up to that limit. These usually have a fee (e.g. a daily rate of 50p) or interest rate (e.g. 10% monthly) attached. Some banks will waive the costs for a period of time with certain accounts.
• Unauthorised/unarranged overdraft: when you spend more than what you have in your bank account or over your pre-set overdraft limit without agreement in advance from your bank. This can often carry a steep fee - currently, banks charge around £35 monthly for going into negatives!

Here’s what changed in April 2020: 

• Daily/monthly fees on overdrafts are being removed
• Overdraft users - whether arranged or unarranged - will be charged a simple annual interest rate (APR) without additional fees and charges for using an overdraft.

If you borrow £100 through an unarranged overdraft, it's expected you would now pay less than 10p per day, instead of the current typical amount of £5 per day. The banks and building societies who have announced new rates already have set them between 19-40%. Check with your bank to find out what your new rate will be.

What should you do next?

• If you’re regularly in your overdraft, you may want to consider other ways of borrowing money, such as 0% interest or lower interest credit cards. You could also look into personal loans at lower rates than what your bank charges for an overdraft.
• You could see if you could benefit from consolidating your debt with a salary-linked Salary Finance loan, click here to find out more. 
• Since banks are now charging a simple annual interest rate on your overdraft, this should make comparing accounts easier so you can work out which account suits you best. 
• Check what rates your banking providers or building societies are charging, and if you’re affected. The FCA has a handy chart to see what the new fee changes are at major banks in comparison to current fees. Otherwise, check your bank’s website or contact them directly.