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How Your Overdraft Could Cost More Than a Short-Term Loan

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Unarranged overdraft fees

With unarranged overdraft fees sometimes costing more than seven times the cost of a short-term loan, Which reaches out to FCA to call for change.

Since 2014, the short-term loans market has been regulated to protect customers from getting into problem debt by capping the amount of interest and charges that customers can be faced with. 

There are other areas of consumer credit that are still operating without regulations to curb the fees and interest that customers can be charged with. Ferratum has previously looked at weekly payment stores and high-interest credit cards

Today, we're looking at unarranged overdraft fees. Consumers' Association brand Which has revealed in new research, that unarranged overdraft fees can cost customers more than seven times as much as a short-term payday loan and are calling on the FCA to take action to protect customers from huge fees and charges. 

What's Happening?

Which's research compared the cost of borrowing £100 for 30 days in an unarranged overdraft - this means borrowing beyond your overdraft limit - across 16 popular high-street banks with borrowing the same amount for the same amount of time in the form of a payday loan. 

Of the 16 banks investigated, 13 charged more than a short-term loan company, and in some cases, by a lot. 

Give Me Some Examples

Due to the capped charges for short-term loans, the cost of a loan of £100 for 30 days would be £24. According to the research from Which;

  • Santander's fees were almost 7.5 times higher, costing £179 over 30 days. 
  • TSB's charges were found to be over 7 times higher, which total charges amounting to £160.00. 
  • HSBC and First Direct were both over 6 times higher, at £150 for the 30 days. 
  • RBS and Natwest charged £144, making them 6 times higher. 
  • Smile, Co-operative Bank, Yorkshire Bank and Clydesdale Bank were all 5 times higher, with charges coming in at £120.

Which reviewed the unarranged overdraft fees levied by the banks in the above examples in April 2018, on fee-free accounts with no minimum monthly payment. The scenario was based on a customer having already utilised a £1000 agreed overdraft facility and included all additional monthly or daily charges that applied as the result of an unarranged overdraft. Fees and charges related to planned overdrafts, interest or paid/unpaid item charges were not included. 

Why Are The Fees So High?

Unarranged overdraft fees can rack up quickly and be costly too, as bank charges apply to your monthly billing period rather than the number of days the money is borrowed for. This can mean that you are charged even more if your unarranged overdraft fell across two charging periods. 

The lack of regulation also means that you could be hit with fixed unarranged overdraft fees, even if you are only overdrawn by a small amount, meaning that the charges are massively inflated from the amount you went overdrawn by. 

What's Being Done?

In 2016, the Competition and Markets Authority took steps to improve the situation by introducing a monthly maximum charge for unarranged overdraft fees, but the measure has had little effect on the number of fees charged by the banks. 

The FCA has also weighed in, pledging to tackle the problem, but as yet much-needed consultations have been delayed, meaning there are no planned interventions at this time. 

Some banks have acted independently to address the issue, with Lloyds Banking Group scrapping unarranged overdraft fees, meaning they now have the lowest charges of all the investigated banks at just £4.20. Santander has also committed to scrapping fees on their paid accounts from July 2018 - although this won't apply to other Santander account. Which is now calling for other banks to follow suit. 

Who's Being Affected?

Last year, the FCA found that one in four people used unarranged overdrafts for more than four months in 2016, and almost one in ten used them for 10 months of the year or more. 

In one bank, less than 5% of consumers pay over £250 per year in unarranged overdraft fees, accounting for up to 60% of the total revenue generated from overdraft fees. At another, 85-90% of unarranged charges are paid by 10-15% of consumers and less than 5% of consumers account for 60% of charges. 

This shows that a vulnerable minority are generating most of the banks' revenue from overdraft fees. 

Peter Tutton, of StepChange Debt Charity, said "

“Overdrafts are the second most common type of debt our charity deals with, leaving many at risk of falling into persistent problem debt by entering a cycle of using their overdraft from month to month. They are meant to be short-term, but our evidence shows that they can all too easily trap in expensive and long-term cycles of persistent debt.”

“Fundamental reform is needed. There has been positive action from some banks to make charging structures clearer and to abolish unarranged overdraft charges. We know that there is some good practice when it comes to the treatment of people with overdraft debt that can be built upon. Banks which have not yet done so should follow suit, while the FCA should investigate unaffordable lending in the overdraft market as part of its upcoming consultation on high-cost credit and overdrafts.”

Until reforms are made, it's wise to keep yourself informed about your banks' policies on unarranged overdraft fees and ensure that you do not end up paying exorbitant fees on your unarranged overdraft. 

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Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk. Representative example: APR 1270% if borrowing £400 for 4 months. Interest rate: 292% p.a. (fixed). Total amount repayable: £665.48 by four instalments of £166.37. Maximum representative APR: 1604% if full loan repaid after 7 days.