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Overdraft interest 'fails to fall in line with base rate'

Published 28 August 2012 by

Further evidence has emerged about how expensive it is to have an overdraft these days. This is despite the Bank of England base rate being so low - which is supposed to make borrowing cheaper.

As reported by the Financial Times, bank account customers pay an average of 14% for an authorised overdraft, according to figures obtained by Moneyfacts. In August 2007, before the credit crunch, an average overdraft charged 13% interest. Back then, the base rate was 5.75%. These days it's 0.5%, and has been for some time.

A Moneyfacts spokesperson, Sylvia Waycot, commented: "Over the past ten years the Bank of England base rate has fallen dramatically, but overdraft rates have had a 'cushioned' fall. It is clear that overdraft charges are still making a sizeable return for the banking sector."

It seems that overdraft rates are not falling in line with the cost of borrowing for banks; perhaps because overdraft fees are one of the ways that banks offset the cost of other free 'in-credit' accounts.

However, we recently reported that free bank accounts could become a thing of the past, after the Head of the FSA Lord Turner, Andrew Bailey of the BoE and consumer Group Which? all described free banking as "a myth".

If banks do begin to charge for all accounts, it remains to be seen whether the cost of borrowing on an overdraft would come down.

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