Lloyds Banking Group has announced it will simplify overdrafts for millions of its customers as it adopts a daily rate model for all, which will vary depending on how much is borrowed and for how long.

From November, a single rate of 1p will be charged per day for every £7 of planned overdraft usage for personal current account customers which Lloyds said will “avoid cumulative fees being charged weeks later”.

It will also do away with unplanned overdraft fees, monthly usage fees and returned item fees, as well as remove a missed payment fee for basic bank account holders.

As an example, a Lloyds Bank customer with a Classic current account who goes overdrawn by £100 within their planned limit for 10 days will pay £1.40 once the changes come into effect. Previously they would have been charged £18.

As a result of the changes, Lloyds said that more than nine in 10 personal current account customers will be either “better off or unaffected financially” by the changes.

How will the changes affect you?

This will be a welcome move by customers who have been hit in the past by high unauthorised charges.

Andrew Hagger of Moneycomms said the move is a radical one from the banking giant which will help many customers understand and manage their accounts.

Currently someone who is £26 overdrawn without arrangement could potentially be charged £86 in unauthorised and monthly fees, something that’s very “difficult to justify”.

Hagger said: “It’s good that the £6 monthly charge has been ditched along with the punitive unauthorised charges which undoubtedly hurt those who were already struggling financially and just made matters worse.

“The new tariff is quite different – charging 1p per day for each £7 borrowed – it doesn’t sound a great deal when you put it like that but it actually works out at approx. 52% in terms of an interest rate so is much more expensive than the clutch of providers who charge less than 18% EAR on authorised borrowing.”

He said the new tariff is much cheaper for its customers with smaller borrowing requirements (due to the axing of the £6 monthly fee) but for those borrowing sums in four figures it starts to get more expensive.

As an example, a £2,000 overdraft for 12 days currently costs a Club Lloyds customer £17.47 but under the new tariff it works out at £34.29.

“The fact that charges are debited to the account each day is unique in the market and will hopefully help consumers budget more easily – rather than being hit with their penalty charges up to a month after going into the red. The best account for your overdraft will depend on how much you go overdrawn and for how long,” he added.

The table below compares the cost of authorised overdraft borrowing:

Source: Moneycomms