The Bank of England revealed that the average bank account customer with an authorised overdraft is paying 19.47% APR. That's even more expensive than many credit cards, so is it worth getting an overdraft if you have to pay so much interest?
For some people, an overdraft is a temptation they don't need. While an overdraft can be handy if an unexpected expense crops up, unless you can repay that money the next month, the interest can soon mount up. If you were overdrawn on your bank account by £1,000 for a year, a 19.47% interest rate would cost you around £200 in interest. That's before you consider any additional fees or charges.
Interest rates like these can drain your bank account if you're regularly overdrawn. Living in your overdraft is also risky because unexpected expenses can crop up from time to time. If you couldn't afford an unexpected cost and extended your overdraft, you could be overdrawn for longer, and pay interest for longer, unless you could repay it quickly. A recent report suggested that around a million people have been forced into taking an expensive payday loan to cover their mortgage or rent in the last 12 months.
Seeing as overdrafts are more expensive now than ever before, choosing a bank account without an overdraft could be a sensible option if you don't think you'll need it - especially if you have trouble managing your money.
Sir Mervyn King, the governor of the Bank of England, conceded earlier this month that consumers are facing a 'ferocious squeeze' on their take-home pay and it seems that the tide is turning on debt. The latest consumer lending figures from the Bank of England indicate £377 million less was lent out last month on credit cards, overdrafts and personal loans - which is the biggest ever drop in consumer lending. It could be that people are unhappy paying interest, when that money could be better spent elsewhere.
If you choose a bank account without an overdraft, you won't have to put up with interest draining your finances. The thinkmoney Personal Account, our alternative to a basic bank account doesn't have an overdraft and comes with additional budgeting help from Money Managers.
If you'd like to know more about ways to deal with debt, you might like to read the thinkmoney guide to getting out of debt .