Three alternatives to dipping into your arranged overdraft

0
Written by: Paloma Kubiak
30/10/2017
People borrowing small amounts of money for a short period of time as part of an arranged overdraft could be paying over the odds. Here are three cheaper alternatives.

For many, overdrafts are an essential part of everyday banking while for others, it could be the start of the debt spiral.

The regulator, the Financial Conduct Authority (FCA) has raised concerns about unarranged overdraft fees, which it said were difficult for consumers to understand.

Separate research by Moneycomms last week revealed that arranged overdraft users – where an amount below zero has been agreed – can also be stung with high fees.

In fact, the research found that customers of the big high street banks are being charged up to 81% interest for a £500 agreed overdraft for seven days.

Later this week, Lloyds Banking Group, including Halifax and the Bank of Scotland, is set to scrap all unauthorised overdraft fees, adopting a daily rate model of 1p for every £7 of planned overdraft usage, equivalent to an interest rate of 52%.

However if you need to borrow money and want to do it without dipping into an arranged or unarranged overdraft, Andrew Hagger of Moneycomms says: “For some people a bank overdraft can be very expensive with fixed monthly or daily fees becoming more commonplace. It’s worth looking at other options such as personal loans from P2P lenders or being smart with credit card offers.”

He lists these alternatives:

Personal loans

Personal loan rates have been coming down recently as competition in the market fired up. £1,000 is the minimum most providers will be able to lend to you in the form of a personal loan.

Hagger lists these three competitive rates and the amount you’ll need to pay back if borrowing £1,000 over a 12 month term:

  • Saga 7.9% APR (over 50’s only) – total payback £1,041.84
  • Nationwide Building Society 15% APR – total payback £1,077.72
  • AA Loans 17.9% APR – total payback £1,092.12.

Peer to Peer loans

P2P lending works by matching individual borrowers or companies with savers who are willing to part with their money in the hope of getting higher rates of interest than they would receive from mainstream savings products. For borrowers, the rates offered can also be lower than high street offerings.

Again looking at £1,000 of borrowing over a 12 month period, borrowers could get the following interest rates, according to Hagger:

  • RateSetter 9.5% APR – total payback  £1,050.00
  • Zopa 9.5% APR – total payback  £1,050.00
  • Lending Works 14.7% APR – total payback £1,076.28.

Credit Cards

There are a range of credit cards to suit your spending needs. However, Hagger warns that if you take advantage of a credit card promotional rate, you need to make sure all your monthly repayments arrive on time, otherwise you will forfeit the introductory rate and you’ll be charged 19% APR or more.

As such, it’s a good idea to set up a direct debit for the minimum monthly payment just in case.

0% on purchases for 31 months from Sainsbury’s Bank. 0% purchase cards allow you to buy items and spread the cost without paying any interest. This card comes with 18.9% rep APR.

Otherwise Hagger lists the MBNA 5 credit card which charges 4.9% typical APR for five years. If you want to switch money from the card , there’s a one-off transfer fee of 0.5% so if you switched £1,000 to your bank account the fee is £5 and interest at 4.9% works out at approximately £4.16 per month.

There are 1 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.
  • Andy__S

    A bit irresponsible…advocating the use of credit cards to fund debt. Surely the best thing is to be debt free and spending/living within your means

Are you a first-time buyer looking for a mortgage?

Look no further, get the help you need by searching for your perfect mortgage

Five ways to get on the property ladder without the Bank of Mum and Dad

A report suggests the Bank of Mum and Dad is running low on funds. Fortunately, there are other options for st...

The essential Your Money guide to the April 2018 tax changes

As we head into the 2018/19 tax year, a number of key changes take place to existing policies while some new i...

A guide to switching energy provider

All you need to know about switching from one energy supplier to another.

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Having a baby and your finances: seven top tips

We’re guessing the Duchess of Cambridge won’t be fretting about maternity pay or whether she’ll still be...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

YourMoney.com Awards 2018

Now in their 21st year, our awards recognise the companies offering the best products and services to consumers

Money Tips of the Week

Read previous post:
Six years of Junior ISAs: three ideas to give your kids a head start in life

Junior ISAs - a savings vehicle for children – turn six this week and every year since 2011, they’ve grown...

Close