Millions of Britons use overdrafts occasionally to cover unexpected outgoings, while many or us are so regularly in the red that we rarely have a positive balance.
Overdrafts are often an expensive way to borrow, though. Here, we explain the various charges you could face, as well as how to borrow for less.
1. Overdraft interest rates are higher than ever
Banks are imposing the highest authorised overdraft interest rates since records began, with today’s borrowers paying an average of 19.47%, according to the Bank of England.
Despite its base rate languishing at just 0.5%, a typical Briton with an overdraft of £1,000 is therefore forking out around £200 in interest charges alone.
2. Unauthorised overdrafts are even more expensive
While authorised overdrafts may seem expensive, going into the red without permission will cost you even more.
This is largely due to the penalty charges you will incur. Barclays, for example, charges £8 (up to a maximum of £40 a day) each time that there is not enough money in your account to cover a payment.
If you are the sort of person who finds it hard to keep your finances in check, it may therefore be worth setting up an authorised overdraft facility just in case.
Alternatively, you could opt for a current account with a so-called overdraft buffer zone. These include the First Direct 1st Account, which allows you to borrow £250 before charges kick in, and the Co-Operative Bank’s Current Account Plus, which will lend up to £200 penalty-free.
3. You can get a free overdraft – but not for long
A number of current accounts offer free overdrafts for new customers.
The Nationwide Building Society FlexAccount, for example, gives new customers an interest-free overdraft for the first three months, while Santander’s Preferred Current Account is currently offering a 12-month free overdraft to account switchers who meet its terms.
Once these introductory deals come to an end, however, authorised overdraft fees and penalties can reach up to £95 a month with Nationwide, while Santander’s standard charges are 50p a day.
4. Interest free doesn’t mean fee free
Some current accounts offer interest-free overdrafts. But this does not mean that you will pay nothing.
The Santander account mentioned above, for example, charges authorised overdraft borrowers who stick within their limits no interest, but does impose a daily fee of 50p (up to a maximum of £5 a month).
Should a customer go over his or her overdraft limit, penalty charges will also apply.
5. You could borrow for less with a credit card
While overdrafts are popular due to their convenience, anyone with a large overdraft should consider saving money by transferring the debt to a 0% credit card.
Barclaycard’s Platinum credit card is currently offering 22 months at 0% (subject to a fee of 2.9%) before its standard rate of 17.9% kicks in.
Meanwhile, the Virgin low fee balance transfer credit card is at 0% for nine months, with a fee of just 1.5%. Its standard rate is also lower than the average authorised overdraft rate at 16.8%.