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Overdraft interest and fees for bank accounts

Last Edit: 21/06/18

Bank accounts, and specifically current accounts, offer a service called an 'overdraft', which is designed to be a short term way to borrow money: overdrafts are typically prearranged with an agreed upon limit, but banks will sometimes provide an unauthorised overdraft. The fees/interest charges on overdrafts changes from bank to bank and from account to account. Prearranged overdrafts are typically cheaper than unauthorised/unarranged overdrafts; usually by a significant amount. As stated, overdrafts are designed to cover short term expenses, and therefore, if used over the longer term, can become an expensive way to borrow money. Some banks provide an 'overdraft control' feature that will prevent payments going out of your account to create an unarranged overdraft -- Natwest Select account is one example of a current account that provides overdraft control.

Overdrafts are offered by UK high street banks like Santander

Overdrafts are offered by UK high street banks like Santander

Unauthorised overdrafts are usually an expensive way to borrow money: with high interest accrued on the balance borrowed, high monthly and daily fees, and sometimes transaction fees. The Competition and Markets Authority (CMA) -- a non-ministerial government department in the United Kingdom -- has recommended banks to provide a Monthly Maximum Charge (MMC) for unarranged overdrafts: this is the maximum amount of fees an overdraft can accrue per month. For example, the Nationwide has set a £50 Monthly Maximum Charge (MMC) for its FlexAccount, FlexPlus or FlexDirect current account. In 2016, there was no mandatory Monthly Maximum Charge (MMC), so the sum varied from bank to bank: in 2017, Lloyds Bank / Halifax / Bank of Scotland had the highest MMC of the high street banks at £95, with Barclays having the lowest at £32. The Financial Conduct Authority (FCA) -- Britain’s financial watchdog -- has 'taken aim' at the 'rip-off' fees levied by banks on unauthorised overdrafts. In May 2018, FCA chief executive Andrew Bailey stated that the FCA plan a significant overhaul of unarranged overdrafts to better protect society's most vulnerable members.

In comparison, arranged overdrafts are typically cheaper than unarranged overdrafts; in the past customers would have to visit a bank branch to arrange an overdraft, but they can now be arranged online. Banks, such as Natwest, promise that they can provide an instant decision for an online arranged overdraft application; if the customer currently banks online with them. Arranged overdrafts generally come with a set: daily usage fee, interest EAR (variable), or monthly usage fee. EAR (variable) stands for Equivalent Annual Rate, and will gives an idea of how much it would cost someone -- in terms of interest accrued and not taking into account overdraft fees -- to remain overdrawn for a whole year. Due to compound interest, what a borrower may owe over 12 months may be much higher than the initial Equivalent annual rate (EAR) number appears -- Equivalent annual rate (EAR) calculators are available online to double check how compound interest works. Some banks also provide an overdraft 'buffer' for their current accounts: which is a facility that means a borrower can become overdrawn without accruing interest or fees. Overdraft buffers are usually fairly small: typically up to £50. Student bank accounts can come with a 0% overdraft: in 2018, the following banks provided a student account with 0% overdraft: Bank of Scotland, Barclays, Halifax, HSBC, Lloyds, Nationwide, NatWest, Santander, and TSB. The 0% overdraft on student accounts only applies to an arranged limit, if a student exceeded that overdraft -- for example £1000 -- then overdraft interest and fees would apply. There is also a select number of 'interest and fee free overdraft' current accounts: which do not charge overdraft fees if you overdrawn up to an arranged amount -- for example £250.