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Cost of an overdraft hits an all-time high

Cost of an overdraft hits an all-time high

Category: Banking

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Borrowing from current account overdrafts is fast and convenient, but it can come at a price, with figures showing that the cost of doing so has escalated significantly in recent years – which means that many consumers can end up paying over the odds for their quick borrowing fix.

Convenient borrowing – but at what cost?

Our latest figures show that the monthly cost of borrowing (based on average authorised overdraft charges) has hit an all-time high of £6.88, three times as much as the average charge of £2.20 seen in 2009. This may seem like an insignificant amount, but over a year this adds up to a hefty £82.56, and that's without factoring in interest.

Indeed, the average authorised interest rate charged on overdrafts has also risen, albeit to a lesser extent, and now stands at 13.89%, up from 12.40% in 2009, meaning that borrowing from an authorised overdraft is becoming an increasingly pricey option.

This is only for an overdraft that's been arranged in advance, too, and unsurprisingly, consumers who dip into their unauthorised overdraft are even worse off. These users are hit by the highest fees of all, with the average fee of an unauthorised overdraft having also hit an all-time high of £57.50 per month, equating to a shocking £690 per year.

This has been accompanied by a slight dip in the interest rates charged, with the average interest on an unauthorised overdraft now standing at 12.85%, down from 19.67% in 2009. However, this will come as little consolation to borrowers facing already sky-high charges, with the sharp increase suggesting that lenders are adapting their account structure to charge flat fees instead of interest.

Paying a high price

Being charged a flat fee may appear more transparent – you know exactly what you'll be charged, unlike with an interest rate, which could leave you wondering what the end result will be – but it could actually work out as being more costly.

"Part of an overdraft's appeal is its simplicity, but in many cases consumers are paying a high price for it," said Rachel Springall, finance expert at Moneyfacts. "More and more current account providers are beginning to charge usage fees, and consumers can end up paying more as a result.

"Worse still, it's become increasingly difficult for people to compare bank account costs to see if they'd be better off moving to an alternative, so many consumers may decide to just stay put rather than deal with the hassle."

Changes on the horizon?

It's hoped that things could improve following the investigation into the retail banking sector, which is expected to come to a close this year. The Competition and Markets Authority (CMA) could implement several changes as a result of its findings, which could "signal a dramatic change in the market", although as yet, there's no guarantee of what will be introduced.

"The best thing consumers can hope for is a universal cap to the fees charged on current account borrowing, including unpaid charges, which could help to level the playing field," said Rachel. "We have already seen recommendations put in place in previous years for credit card default charges and payday loan interest, so there's little reason for something similar not to be introduced for bank accounts.

"Consumers would also benefit from having a more immediate reaction from their bank when they become overdrawn, as well as a new industry-standard grace period in which they can credit their account. Providers could alert a customer by text or app, for example, and then the borrower could send funds from their savings or another bank account to prevent charges being incurred.

"The complexities of current accounts are likely to remain a problem for years to come, but small nudges to encourage consumers to keep a closer eye on their transactions will hopefully give them a greater incentive to switch to a more cost-effective account."

What next?

Tired of paying too much for your overdraft? Compare current accounts and see if you can find a cheaper alternative

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.