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Can unarranged overdrafts cost more than payday loans?

Published 11 July 2016 by

An overdraft can come in handy for times when your income just isn’t stretching enough, if you have an account with this feature. But an overdraft is still a form of credit and if you go over the maximum overdraft limit you could be faced with fees and charges.

According to new research by Which?, borrowing from an unarranged overdraft can prove particularly costly. The findings show that customers face higher charges for using an unarranged overdraft than they would if they took out a payday loan.

How much more?

The new research finds that borrowing £100 on an unarranged overdraft could work out 12.5 times more expensive than payday loans companies are allowed to charge. This is when borrowing the same amount for the same period.

The regulator compared the cost of borrowing £100 for 28 days and found that some high street banks charge as much as £90 – four times the maximum charge of £22.40 on a payday loan. Charges for unarranged overdrafts can be more than this depending on the circumstances.

This isn’t the first time the issue of unarranged overdraft charges has been raised. The Competition and Markets Authority (CMA) called for banks to set their own charge cap on monthly unauthorised overdrafts and show these clearly, after its review of retail banking in the UK.

Which? is critical of this and calls for unarranged overdraft charges to be set at the same level as arranged overdraft charges instead. It also says that the FCA should review overdraft charges in relation to other forms of credit and crackdown on fees.

As part of its review, the CMA found a wide range of unarranged overdraft fees. This can vary depending on the bank but some charge daily fees of £5 or £10, while others charge monthly fees or interest. The charges you’ll face for dipping into your overdraft will vary depending on whether it’s authorised with your account provider or not.

thinkmoney Personal Account

If you find that you’re regularly running out of money towards the end of the month, you might benefit from take another look at your household budget (or putting a budget together if you don’t already have one). Sticking to a budget could help you manage your money better and avoid you from slipping into your overdraft.

Do you find yourself overdrawn most of the time? You might need to take more dramatic action. It may be worth considering opening an account with an alternative provider, such as the thinkmoney Personal Account.

The budgeting account will help you manage your outgoings and incomes by keeping the money that you need for your regular commitments separate from your spending money. The account comes with a monthly management fee of £17.50 and £24.50 for a joint account.

You can read more about the features that come with the thinkmoney Personal Account here.

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