Arranged overdraft borrowers face up to 81% interest
Customers of the big high street banks are being charged the equivalent of between 52% and 81% interest for a £500 agreed overdraft for seven days, analysis reveals.
It used to be the case that borrowers would pay a daily interest charge, typically around 15% to 20% EAR for an agreed overdraft facility.
In recent years, the introduction of fixed monthly or daily fees has seen the cost of authorised overdrafts rocket, particularly for those borrowing smaller amounts for a shorter period of time.
Andrew Hagger of Moneycomms, said these “out of line” rates are more in keeping with subprime credit cards and guarantor loans where the risk is much higher.
The Financial Conduct Authority (FCA) has recently stated that half the UK population are financially vulnerable, Hagger said these sorts of charges for agreed borrowing are “not helping”.
Lloyds Bank, the Bank of Scotland and Halifax will introduce revised overdraft charges from 2 November which will make their tariffs cheaper as they remove the £6 a month charge. However, the new 1p per day charge for each £7 borrowed still equates to an interest charged of around 52%.
They said the new daily fees are easier to understand for customers, but Hagger warns that they can prove to be far more expensive than a standard interest rate tariff. This is particularly the case for people borrowing small overdrafts for just a couple of days.
The NatWest and RBS charge for a one day overdraft of £250 would be £6.12 – this is the equivalent interest charge of 894%.
The table below highlights the best and worst agreed overdraft charges offered by the big banks:
Hagger said: “Those being hit by these rip off charges are potentially people with spotless credit records– you can understand rates of 50% plus for subprime credit cards and guarantor loans where the risk is far greater but for an agreed bank overdraft these rates appear unfair and way out of line.
“Only last week the FCA reported that 4.1 million people are in serious financial difficulty and that 36% of 25-34 year olds had been overdrawn in the last 12 months – charges of 50% plus for agreed overdrafts are just adding fuel to the fire while driving extra profits for the banks.”