How much does it really cost to go overdrawn?

Published:
08 July 2010
Topic:
News,Money,Current Accounts

We all know that it is better to stay in the black on our current accounts if possible due to the fees and often punitive interest rates charged when we go overdrawn.

But millions of Britons slip into the red every so often, with many more people finding it hard to stay out of overdraft territory for a significant proportion of the month due to the financial strain of the recession.

Most people wouldn't be able to tell you exactly how much borrowing from their current account providers in this way is costing them, though, especially as a number of banks have recently changed their charging structures.

Within the last few weeks, for example, both Lloyds TSB and Santander have announced new charging structures for those with authorised overdrafts, while reducing the fees imposed on people who go overdrawn without permission. They don't take effect until later in the year but some customers will end up paying more as a result.

Lloyds, for example, is cutting its unauthorised borrowing charges in December but it is introducing a new £5 monthly fee for all customers who use an overdraft which means those who currently go overdrawn every month with permission, will pay an extra £60 a year.

Here, we investigate the true cost of going into the red with the different banks and building societies to help you find the best account for you.

What are the costs associated with slipping into the red?

The huge majority of current account providers impose both interest charges and fees on customers who go overdrawn, although there are some deals on the market that allow you to avoid paying for an overdraft for a certain period, or up to a certain amount.

However, perhaps the first point to make when thinking about how to keep overdraft costs down is that it is always preferable to inform your bank before you go into the red.

That way, you avoid the fees and charges imposed for unauthorised borrowing, which are always much higher than those you have to pay on authorised overdrafts.

It can therefore be a good idea to set up an overdraft facility 'just in case', while those who often slip into the red should definitely arrange an overdraft to cover any end-of-the-month financial difficulties.

The only exception to this rule is with current accounts that offer fee-free "buffer zones" designed to prevent charges should unexpected payments take you below £0 every once in a while - although these are only generally for amounts of up to £250.

It is, however, also worth mentioning that once you have an overdraft facility in place, you must be disciplined enough to use it only when absolutely necessary.

Which is the best current account for me?

If you know that you have a tendency to slip into the red, then the interest and charges you have to pay on your overdraft are likely to be more important than the in-credit interest rate or linked benefits that you receive.

However, the best account for you will also depend on exactly how you use you overdraft, and to what extent.

Accounts with "buffer zones", for example, may well prove the best bet if you only occasionally slip into the red during an expensive month. First Direct has a £250 interest-free buffer zone, while at The Co-operative Bank it's £200.

Anyone who only expects to be in overdraft territory in the short term could also consider an account with an introductory overdraft offer, such as Santander's Preferred Overdraft Rate account with its offer of 0% for the first 12 months as long as you pay in at least £1,000 every month.

If, on the other hand, you spend the majority of the month with a balance of below £0, this may not prove the best choice in the long run. In-depth research is required to ensure you pick the right account.

Consider, for example, the Halifax Reward account. Its £5 monthly reward policy for customers who pay in £1,000 or more is the best bet for people going £1,000 or £1,500 overdrawn for one day per month as the charge is just £1 a day up to £2,500, leaving them £4 up each month.

 

But anyone constantly borrowing to this level via his or her Halifax overdraft would pay a massive £300 a year, or £25, a month - making it the most expensive account we probed. (See table below)

Meanwhile, if you have an Alliance & Leicester Premier Direct account, the overdraft charges are 50p per day up to a maximum of £5 a month - unless you took the account out within the last 12 months, in which case you can have a fee-free overdraft of up to £2,500.

Anyone who is overdrawn by £1,000 for one day each month will therefore pay £6 a year, while those who are always in the red pay £60 a year. This will also be the case with the Santander account that is replacing Premier Direct at the end of the year.

But Santander's Preferred Overdraft Rate account, which charges interest on arranged overdrafts at 12.90% would cost the same borrowers £4.20 and £126 a year respectively.

So while it is the cheaper option for anyone who only slips into the red for one day a month, it is significantly more expensive for someone who is constantly overdrawn.

If you look at the same accounts for someone who goes £1,500 overdrawn for one day a month, however, the Preferred Overdraft Rate account becomes poorer value on an annual basis at £6.36, while the cost for those constantly overdrawn by the same amount is even higher at £189 a year.

Lloyds TSB's Classic account, on the other hand, will from the end of the year charge someone borrowing £1,500 £69.24 a year for one day per month and £338.88 a year for a constant balance, making it an expensive option either way.

How much does a £500 overdraft cost?

Provider & account

Authorised overdraft rate (typical EAR)

1 day
per month

5 days
per month

30 days
per month

Alliance & Leicester
Premier Direct Current Account
(no longer available to new customers)

50p per day,
maximum £5 per month

50p

£2.50

£5

Santander
Preferred Overdraft Rate Account

12.90%

18p

90p

£5.40

Barclays
Barclays Bank Account

19.30%

26p

£1.32

£7.94 

Halifax
Reward Current Account

 Up to 2,500 - £1 per day
Over £2,500 - £2 per day

£4.00
(in-credit) 

nil

£25

Nationwide Buidling Society
FlexAccount

18.90%

26p

£1.30

£7.80

Lloyds TSB
Classic Account Plus

18.90%

26p

£1.30

£7.80

NatWest
Current Plus

19.24%

27p

£1.35

£8.10

HSBC
Bank Account

19.90%

28p

£1.40

£8.40

Lloyds TSB
Classic Account Plus
(from December 2010)

18.90% 
plus £5 overdraft usage fee

£5.25

£6.27

£12.64

Source: www.moneysupermarket.com July 6, 2010.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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