With Lloyds Bank and Halifax introducing a revised overdraft charging tariff from 2nd November, Andrew Hagger of Moneycomms looks at how some customers with the big banks are paying way over the odds for agreed overdrafts.
At one time all you would pay to use an agreed overdraft facility would be a daily interest charge, typically around 15% to 20% EAR.
However, in recent years the introduction of fixed monthly or daily fees has seen the cost of authorised overdrafts rocket – particularly for smaller sums and for short durations.
The new Lloyds Bank, Bank of Scotland and Halifax tariffs are slightly cheaper than its existing tariff due to the removal of the £6 monthly charge; however the new 1p per day charge for each £7 borrowed still equates to an interest charge of around 52%.
Fixed fees (Monthly or Daily) are particularly expensive for small overdrafts and those lasting just a day or two – if you want to take it to the extreme the NatWest/RBS charge for a one day overdraft of £250 would be £6.12 – in terms of an equivalent interest charge it comes to 894% – this highlights just how unfair the monthly fee can be as you are charged the same £6 fee whether you are overdrawn for 1 day or 30 days.
Banks say daily fees easier to understand – that may be the case but for many people it can also prove to be far more expensive than a standard interest rate tariff without a fee.
The table below not only highlights the worst offenders but also shows that some banks offer a far more reasonable level of charging – using a simple daily interest rate which works out at a fraction of the cost to the borrower.
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.
|Bank||Account||Tariff for agreed overdrafts||Cost £500 x 7 days||Equivalent interest rate|
|NatWest/RBS||Select||£6 monthly fee + 19.89% EAR||£7.75||81%|
|TSB||Classic||£6 monthly fee + 19.85% EAR (first £25 free)||£7.67||80%|
|123||£1 per day up to £2,000||£7.00||73%|
|Barclays||Bank Account||75p per day up to £1,000||£5.25||55%|
|Lloyds Bank||Classic||1p per £7 borrowed per day (from 2 Nov 17)||£4.97||52%|
|Halifax||Reward||1p per £7 borrowed per day (from 2 Nov 17)||£4.97||52%|
|Standard Account||14.6% EAR||£1.32||14.6%|
|Current||15.9% (First £100 free)||£1.14||15.9%|
|1st account||15.9% (First £250 free)||£0.71||15.9%|
|Research & Calculations – Moneycomms.co.uk 23.10.2017|