Using your overdraft could now cost a lot more than before
Lloyds - one of the banks increasing the rate they charge for customer overdrafts.
From April 2020, the costs of overdrafts are changing. The
Financial Conduct Authority has changed UK regulations, relating to overdraft
If you use an overdraft, it’s essential to be clued up on the
changes to interest calculations.
The Financial Conduct Authority has stated that banks can no
longer charge a daily or monthly overdraft fee.
Additionally. unarranged overdrafts can not be more expensive
than arranged ones.
From April, overdrafts will be charged at a single Annual
Percentage Rate (APR).
What’s the impact?
The Financial Conduct Authority intended to make things more
simple. Using APRs, you can compare overdrafts with other types of borrowing.
Now, overdrafts may be more expensive than traditional credit cards. It’s important to choose the right way to borrow.
But, the overdraft charges may be higher than they might have
intended. For some people, the new system makes borrowing even more costly.
Now, overdrafts may be more expensive than traditional credit cards. It’s important to choose the right way to borrow. Thankfully, comparing is now easier than ever.
How much will the banks charge?
Most banks have announced APRs of almost 40%. For more high-risk borrowers, a higher interest rate might be offered.
For many banks, the new interest rates are higher than what
was previously charged. Where First Direct charged 15.9%, it will now charge
39.9%. The same new rate applies to the Nationwide FlexAccount, which
previously charged 18.9%.
Most of the banks have fallen in line, charging the same or
very similar rates. Borrowing from one is much the same as borrowing from
another, though if you’ve accidentally gone into the red each account might have
a different interest-free buffer.
All of these banks will charge new rates of 35-40%.
Who will benefit from the changes?
Banks can no longer charge additional fees for unarranged
overdrafts. In the past, you’d pay more if you dipped into debt unexpectedly.
Now, you’ll be charged the same rate as someone with a planned overdraft.
Banks can no longer charge additional fees for unarranged overdrafts.
Many banks will still offer small interest-free buffers,
protecting you from charges if you accidentally overspend.
If you have a small overdraft, the new APR may be less
expensive than the previous daily rates.
Who will lose out?
If you live in your overdraft and are in constant debt, then there’s a good chance that you will pay more. Those with a larger overdraft could pay significantly more, with MoneySavingExpert’s Martin Lewis saying that a £2,000 overdraft could almost double in price.
What can you do to avoid high charges?
If you have an overdraft, look into the new charges you’ll
pay. Most banks have already announced their new rates, though they may not be
launched until April.
If you have an overdraft that will be expensive, now’s the
time to start clearing your debt. If you have an overdraft and credit card, pay
the minimum on the credit card each month. Then, you can use all extra money to
lower your bank account borrowing.
In some extreme cases, it may be best to spend on your credit
card for things that you’d usually have cash for. Then, you can use the cash to
reduce your overdraft debt.