Will New Overdraft Charges Affect You?Posted on Jun 12, 2020
Updated June 2020
In early March, we published this News Blog about changes to overdraft charges. With interest rates set to rise to 40%, an estimated 8 million would be paying more, and for some, overdraft charges could almost double.
With the coronavirus pandemic and lockdown, the changes couldn’t have come at a worse time. As part of measures to support those struggling financially, the FCA announced in early April, that, temporarily, no one would pay more under the new system –
- Banks must give up to the first £500 of a customer’s overdraft interest-free for 3 months to customers struggling due to coronavirus.
- If your overdraft limit is less than £500, your bank must give you your whole overdraft interest-free.
- Banks must ensure that no one pays more for their overdraft than before.
Banks needed to implement these measures by 14 April, for 3 months, until 14 July 2020.
MoneySaving Expert hopes the interest-free help will be extended, but there is been no word as yet.
So if you have an overdraft, read on and make sure you’re aware how the new overdraft charges will affect you. A Penny Post loan, with bite-sized repayments straight from your pay, could help you get out of your overdraft and save you money.
Original News Blog
Published 11th March 2020
Bank overdraft fees are undergoing a major shake-up, and for some, overdraft costs could almost double. Are you going to be one of the 8 million set to pay more?
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. Around 19 million people use an arranged overdraft each year, according to the FCA, and about 14 million people use an unarranged overdraft each year.
New rules being introduced by financial regulator the Financial Conduct Authority (FCA) should make overdrafts ‘simpler, fairer, and easier to manage’. The new rules start from April 2020, but some banks and building societies are introducing these changes earlier.
What changes are being introduced?
The 3 main changes which will affect your overdraft are:
- Interest on all overdrafts will be 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.
This means you might lose your interest-free overdraft and/or overdraft buffer – check with your bank.
How much will I pay?
Most banks and building societies have chosen to set an interest rate between 35% and 40% from April.
It’s also worth noting that in most cases the new 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, while Lloyds will charge most customers 39.9%, people with a bad credit record will pay 49.9%.
Will my overdraft cost more?
It depends on your circumstances. Moneyfacts.co.uk suggest savings for those who accidently go overdrawn or use small arranged overdrafts, but higher charges for those who regularly use a larger arranged overdraft.
Some consumers could be paying over twice as much for arranged overdrafts – in a recent BBC report Claire Griffiths from Northamptonshire estimates her overdraft cost will nearly double.
In general, if you find yourself in your overdraft for most of the month, then it’s likely these changes will cost you more.
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 a 40% overdraft’.
A Penny Post Silver Loan, with a fixed 24.9% APR, is a lower interest rate than a 39.9% APR overdraft, 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: a £2,000 Silver Loan to pay off an overdraft, total interest £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.
So act now, and make sure you’re aware how the new overdraft charges will affect you. A Penny Post loan, with bite-sized repayments straight from your pay, could help you get out of your overdraft and save you money.
Representative example –
Monthly repayments – Borrowing £2,000 over 24 months will cost £104 a month. Total amount repayable is £2497 which includes interest at 24.9% APR.