Leanne Macardle

Leanne Macardle

Editor
Published: 01/03/2019

At a glance

  • An overdraft comes into play when more money is taken from a bank account than is held in it.
  • While an arranged overdraft is pre-agreed with your bank to a certain limit, charges will still apply.
  • An unarranged overdraft is not pre-agreed, and will usually incur even greater charges.
  • If you think you’re going to go slightly overdrawn for a short period of time, check with your bank whether they offer an interest-free buffer zone.

How do you use your current account? Do you regularly have to dip into your overdraft?

Overdrafts are a form of borrowing from your bank or building society, and they can be expensive, so it's important to compare the EAR interest rate as well as any charges when you choose a current account. They are open-ended so don’t have a specific end date when the debt has to be repaid.

Overdraft buffers

Some banks and building societies will offer a small interest-free buffer zone if you become overdrawn by a few pounds.

If you think you are going to become overdrawn, contact your bank to find out if you'll go beyond your interest-free buffer and see if you can get a temporary overdraft to avoid any charges.

Arranged and unarranged overdrafts

There are two types of overdraft: arranged and unarranged.

  • Arranged overdrafts are pre-agreed and allow you to go overdrawn (or borrow) up to a certain limit, normally at a set rate of interest. Some banks may charge a monthly or a daily usage fee, which may be instead of interest or in addition to interest.
  • Unarranged overdrafts are not pre-agreed. This may be because you don't have an arranged overdraft at all, or you have gone over your arranged overdraft limit. The bank or building society may honour your payments, although they will probably charge you a fee for doing so and potentially additional daily fees as well. Interest rates for unarranged overdrafts can be much higher than for arranged overdrafts (up to 30%!), so they're a very expensive form of borrowing. If you know you're going to creep into an unarranged overdraft, try contacting your bank in advance to see if you can arrange a temporary arranged overdraft instead.

Is an overdraft current account right for you?

If you tend to use an overdraft each month, it's better to have a pre-agreed arranged overdraft. Even pre-agreed overdrafts can be expensive, so you should only rely on your overdraft for cashflow between paydays, not for longer-term borrowing.

If you find your overdraft balance creeping up or staying the same, month after month, take action and read this guide to repaying your overdraft.

However, if you use your overdraft sparingly and pay it off within a couple of months, make sure your current account is competitive by checking out our selection of the best overdraft current accounts.

Alternatives to overdrafts

If you dip into your overdraft because of occasional retail spending, consider using a credit card instead.

You get an interest-free grace period of up to two months on a credit card (which you don't get from an overdraft) plus the added benefit of purchase protection on purchases over £100. Just be sure to clear the balance in full at the end of the month or this option could become more expensive

Payday loans should be considered a real last resort as they can charge significantly higher annual rates of interest!

Moneyfacts tip

Moneyfacts tip Leanne Macardle

If you really need to borrow a small amount of money quickly, make sure you check with your bank to increase your overdraft or contact your credit card provider to up your credit limit.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

man and woman helping a girl to ride a bike

At a glance

  • An overdraft comes into play when more money is taken from a bank account than is held in it.
  • While an arranged overdraft is pre-agreed with your bank to a certain limit, charges will still apply.
  • An unarranged overdraft is not pre-agreed, and will usually incur even greater charges.
  • If you think you’re going to go slightly overdrawn for a short period of time, check with your bank whether they offer an interest-free buffer zone.

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