The true cost of an overdraft
We look at the true cost of an overdraft.
As a general rule overdrafts are not a good idea unless they’re absolutely essential – especially unauthorised overdrafts where the charges can be close to extortionate.
And even authorised overdrafts can be pretty expensive. A fair number of banks charge around 19% when you go into the red but some accounts charge daily or weekly fees – and these fees can be even more expensive than a 19% interest charge.
Look at this table:
Cost of a £1,000 authorised overdraft
|
Bank |
Authorised overdraft |
Monthly cost |
Daily charge |
Interest-free buffer |
Total Annual cost |
Equivalent APR |
|
On approved overdrafts over £200, you’ll pay 19.3% up to a maximum of £5,000. Then you can apply for personal reserve on top of this |
|
|
£200 |
£193.0 |
19.3% |
|
|
Barclays Bank – Personal Reserve |
£22 for every five days that account is overdrawn |
£95.33 |
|
|
£1114.00 |
£114% |
|
Halifax |
£1 a day that account is overdrawn up to £1,999.99 debit balance. You can get a free unauthorised overdraft for first year you have account |
£28/£29/£30/£31 |
|
|
£365.00 |
36.5% |
|
Lloyds Classic Account |
19.89% plus £6 for every month that you are overdrawn. £25 overdraft is free |
£6 |
£1 |
£25 |
£266.42 |
26.65% |
|
£1 a day fee capped at £20 a month, no fee for first four months you have the account |
£20 |
£1 |
|
£240.00 |
24% |
|
|
HSBC Current Account |
Standard overdraft of 19.9% |
|
|
|
|
19.9% |
|
19.89% interest but first £100 of overdraft is interest-free |
|
|
£100 |
|
19.89% |
|
|
19.89% but first £100 of overdraft is interest-free |
|
|
£100 |
|
19.89% |
The most expensive overdraft in the table is the Barclays Personal Reserve. In fairness to Barclays, you won’t be paying the Personal Reserve charges on a small overdraft. Initially you’ll pay 19.3% on any overdraft up to your approved limit, which may be as high as £5,000.
But if you want to get an authorised overdraft beyond that limit you’ll have to get a Personal Reserve where the charge is £22 for every five days that the account is overdrawn. So if you borrow £1,000 via your Personal Reserve, you’ll be paying charges equivalent to a 114.4% interest rate. Obviously, that’s extremely high.
Still pricey
An overdraft with the Halifax is also very pricey. The daily £1 fee works out at 36.5% a year on a £1000 overdraft while the Lloyds Classic account effectively charges a 26.64% interest rate.
Again, it’s very clear that accounts which charge a daily or weekly fee can be more expensive than accounts which charge an upfront interest rate – especially if your overdraft is relatively small at around the £1,000 mark.
Alternatives
So if these figures have put you off taking out an overdraft, what can you do instead?
Well, one option is to borrow on a credit card. Don’t forget that spending on a credit card normally allows you to borrow interest-free for around a month. (You won’t pay any interest on your spending until you receive your next credit card bill.)
If you need to borrow for a longer period, you could do a money transfer on some credit cards. This is where you transfer money from your credit card to your current account and you don’t have to pay any interest on the resulting debt for a year or more. You will, however, have to pay a transfer fee which is typically around the 4% mark.
Currently the best money transfer card is probably the MBNA 23 Month Platinum Visa card which will give you a 23-month interest-free period.
Or you could take out a personal loan. Right now, the cheapest loan costs just 5.1% which is a very attractive rate. The downside to personal loans is that they are traditionally inflexible, but that has now changed somewhat and you can normally repay your loan early without having to pay extra charges. Read more in Overpay your loan without penalty.
You could also consider borrowing via the peer-to-peer lenders such as Zopa and RateSetter.
Frodo
Another option is Frodo Flexi. This is a new product that was launched towards the end of last year. It’s really a cross between an overdraft and a credit card.
The idea is that you keep your current account with your existing bank, but you can also get a credit facility from Frodo Flexi on top of that.
Effectively it’s a second overdraft. If your application is successful you’ll get a credit limit of between £1,000 and £10,000 and you’ll pay an interest rate of 16.9%. You’ll pay no extra fees or charges, so it will work out cheaper than all the other overdrafts I highlighted in the table at the top of this article. Read more in Frodo Finance’s flexible overdraft.
However you decide to borrow, make sure that you look carefully at all the costs – daily or monthly fees can look fairly cheap at first glance but can work out as more expensive than you might think.
More on bank accounts and loans:
Three ways to get an interest-free loan
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