Overdraft Rates Rise But Borrowing Becomes Cheaper | moneyfacts.co.uk

Derin Clark

Derin Clark

Online Reporter
Published: 22/09/2020

Although overdraft rates have risen year-on-year, borrowing has actually become cheaper for many consumers as banks and building societies scrap overdraft usage flat fees.

Figures published in the latest Moneyfacts UK Unsecured Lending Trends Treasury Report show that average overdraft EAR has risen by 14.63% since September 2019, with average arranged overdraft EAR rising from 12.34% in September 2019 to 26.97% this month, and average unarranged overdraft EAR rising from 6.58% during September 2019 to 14.55% this month.

Despite the rise in both arranged and unarranged overdraft EAR, the total cost of borrowing has fallen. For example, the total arranged cost for £500 over 30 days has fallen from £12.49 in September 2019 to £9.91 this month. Meanwhile, the cost of borrowing on an unarranged overdraft has fallen significantly year-on-year. For example, the total cost of borrowing £500 over 30 days on an unarranged overdraft would have been £39.52 during September 2019, whereas this month it is just £5.61.

Why has the cost of borrowing fallen?

The main factor that has resulted in overdraft borrowing becoming cheaper, despite EAR rising, is due to banks and building societies scrapping their overdraft usage flat fees earlier this year. As Rachel Springall, finance expert at Moneyfacts.co.uk, explained: “Providers have clearly moved in a similar direction since the ban on overdraft usage flat fees came into play on 6 April 2020, and on the face of it, it appears borrowers could be better off now that the extortionate usage fees have disappeared. This is particularly notable for those who find themselves in financial difficulties and dip into their unarranged overdraft facility. The changes that shook up the market will provide more transparency to consumers to compare tariffs, but the rise to overdraft interest rates does mean that using an arranged overdraft can be more expensive than using a standard credit card.”

What to do if you are unhappy with your overdraft rate

At the beginning of this year, many banks and building societies announced the changes they were making to their overdraft fees, which can be found here.

Those who are unhappy with changes that have been made to their current account’s overdraft fees can consider switching accounts, as Springall explained: “Consumers who are unsatisfied with their current account may be looking to switch, and in recent weeks with cash incentives launched onto the market, it will be interesting to see whether these draw in new customers. The Q1 2020 Current Account Switcher Service statistics revealed large losses for Santander and Halifax, but the biggest net customer gains were seen at HSBC, Nationwide, Monzo Bank, NatWest and Starling Bank – all of which have either some rewarding current accounts or with the challenger banks, very high levels of service and competitive overdraft tariffs. Considering the changes to overdrafts, some consumers may be switching to alternative brands now that they are able to compare tariffs more easily.”

For more information about switching current accounts, read our guide How to switch current accounts.

Overdraft borrowing remains an expensive way for consumers to borrow, so ideally you should be working towards paying off overdraft debt. For tips on how to clear overdraft debt, read our guide Seven steps to getting (and staying) overdraft-free.

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.

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