Will you be a winner or loser from the overdraft rate shake-up?
Next month sees the official introduction of new overdraft rules which mean some customers will pay up to 50% EAR – double the rate currently charged. But will you be a winner or a loser from the reforms?
New Financial Conduct Authority (FCA) rules coming into force in April mean lenders will no longer be able to charge customers higher prices for unarranged overdrafts in comparison to arranged overdrafts.
The FCA has also banned fixed daily or monthly charges, and fees for having an overdraft facility in a bid to amend the ‘dysfunctional’ market.
While seemingly positive, the radical reforms have resulted in banks and building societies hiking arranged overdraft rates, with most setting their new rates at 39.9%.
Research by data site Moneyfacts revealed that costs may fall for some customers after the changes, but not for everyone.
It found that customers who borrow £500 over 30 days on their arranged overdraft could see fees rise by £6.82 with a high street current account provider. One brand – Metro Bank – has actually doubled the cost to borrow on its arranged facility despite previously not charging a usage fee.
But for someone using an unarranged overdraft for 30 days borrowing £500 could see fees fall by over £60. Only Metro Bank customers will see costs rise on this basis.
Moneyfacts said borrowers could now find it cheaper to borrow using a credit card, where rates start at 9.9% APR.
Rachel Springall, finance expert at Moneyfacts, said: “The much-needed overhaul of the charges has been a double-edged sword for some, while Barclays, Halifax, Lloyds, Monzo, Santander and Virgin Money are among those providers that will charge less.
“Meanwhile, Metro Bank has recently announced it will charge customers £6.40 more, hiking its 15.0% rate to 34.0%, even though it did not charge usage fees before and was one of the most competitive tariffs on the market. Other challenger banks do not appear to be following suit though, in fact Monzo will charge 19% instead of 50p per day and save customers £7.80, Starling Bank will keep its 15% rate and Virgin Money’s new tariff will save customers £3.34.”
However, on the flip side, the reforms could mean customers of the biggest brands make an astonishing saving. As an example, Barclays Bank account customers will save over £10 in charges when using their arranged overdraft.
Clearer information to compare overdraft tariffs
Springall said the changes mean customers will be able to compare overdraft tariffs more easily now that usage fees have been banned.
“As some of the most well-known brands are pricing their tariffs between 35% and 39.9%, there isn’t too much difference to choose between them for a cost-saving, so we could see an uplift in customers switching to challenger banks that are a cheaper alternative.
“Clearly borrowers will need to think carefully about whether an overdraft will be the most cost-effective method to borrow, as a credit card could well be a cheaper alternative – in fact, some store cards now charge less. The lowest purchase rate on a standard credit card is 9.9% APR, at the moment store cards charge up to 29.9% APR and the average credit card rate on the market is currently 24.8% APR. Credit cards can be just as convenient as using a bank account to borrow and they offer additional protection under Section 75 of the Consumer Credit Act.”
The table below shows analysis of arranged overdraft rates before and after the new rules:
The table below shows analysis of unarranged overdraft rates before and after the new rules: