What is your Overdraft costing?Posted on Sep 23, 2022
Did you know overdrafts are now one of the most expensive forms of debt, so what is your overdraft costing you?
Many people rely on their overdraft. An arranged overdraft can provide a convenient way to help with short-term cash-flow issues and unexpected costs. It’s estimated that around 19 million people use an arranged overdraft each year, whilst about 14 million people use an unarranged overdraft each year.
Back in 2020, when the world was focusing on Covid-19, bank overdrafts underwent a major shake-up. The financial regulator, the Financial Conduct Authority (FCA), introduced new rules which it hoped would make overdrafts ‘simpler, fairer, and easier to manage’. However, following these changes an estimated 8 million people now pay more, and for some, overdraft charges have almost doubled.
So, if you have an overdraft, read on, and make sure you’re aware what your overdraft is costing you.
What changes were introduced?
The 3 main changes affecting overdrafts were:
- Interest on all overdrafts is charged at a single annual interest rate (APR).
- No daily or monthly fees for using your overdraft.
- The same interest rate for arranged and unarranged overdrafts.
Some banks are cancelling unused overdrafts too, which many customers used as a ‘safety net’, so check with your bank, or read this advice from Money Saving Expert.
How much is your overdraft costing?
Most banks and building societies charge an interest rate between 30% and 40% for overdrafts, but it could be as much as 50% for some.
It’s also worth noting that in most cases the rates are ‘representative APRs’, meaning only 51% of accepted applicants need to get the advertised rate. Banks can also charge some customers a higher interest rate. For example, Lloyds charge most Classic account customers 39.9%. However they say- “Your interest rate will be based on how you manage any accounts you have with us and on the credit information we hold about you”, so people with bad credit record will pay more.
If you find yourself in your overdraft for most of the month, take a few minutes to check with your bank to find out what your overdraft is costing you.
How much do you owe on your overdraft?
With overdrafts being one of the most expensive debts, and typically very difficult to get out of as there’s no set repayment plan, it’s important to know how much you owe.
Check your bank balance, check your overdraft limit, and check your last few bank statements to find out your usual balance just before payday. Just before payday is when you likely to be most overdrawn, so this is the amount you typically owe on your overdraft.
Could a Penny Post loan help?
According to Moneysavingexpert.com getting a loan to pay off an overdraft is ‘a decent option, as it’s likely to have a cheaper interest rate than your overdraft’.
A Penny Post Silver Loan, with a fixed 24.9% APR, is a lower interest rate than a 39.9% APR overdraft (but you may be paying more) and could be significantly cheaper for long-term overdraft users. And… at Penny Post we don’t use a representative APR; instead, a fixed APR, so the rate you see, is the rate you get.
For example: with a £2,000 Silver Loan to pay off an overdraft, total interest would be £497, if repaid over 24 months. Borrowing £2,000 at 39.9% APR over the same period and repay £765 in interest – a £268 saving.
Top tip – Moneysavingexpert.com also recommend asking your bank to lower your overdraft limit to £0, so you’re not tempted to run the debt back up to your limit again and have both debts to deal with.
A Penny Post loan, with bite-sized repayments straight from your pay, could help you get out of your overdraft and save you money too.
Monthly repayments – Borrowing £2,000 over 24 months will cost £104 a month. Total amount repayable is £2,497 which includes interest at 24.9% APR.