An overdraft can be a useful way to borrow a little extra from the bank when you don’t have spare savings. But there's new rules being put in place by the Financial Conduct Authority (FCA) in April 2020, affecting the way overdrafts are set up. So, what are they, and how will they affect you?
Well first of all - what is an overdraft and why do we even have them? In an ideal world, you’d have a savings buffer to prepare for emergencies or a large expenditure. However, life has a way of throwing us a few curveballs. Banks offer overdrafts to assist - this is a way of borrowing from your bank through your current account. It’s a form of debt, and often comes with a fee attached.
There are two types of overdraft:
- Authorised/arranged overdraft: where you’ve pre-agreed with your bank that you can borrow up to a pre-set limit and you can spend up to that limit. These usually have a fee (e.g. a daily rate of 50p) or interest rate (e.g. 10% monthly) attached. Some banks will waive the costs for a period of time with certain accounts.
- Unauthorised/unarranged overdraft: when spend more than what you have in your bank account or over your pre-set overdraft limit without agreement in advance from your bank. This can often carry a steep fee - currently, banks charge around £35 monthly for going into negatives!
Here’s what’s changing:
- Daily/monthly fees on overdrafts are being removed
- Overdraft users - whether arranged or unarranged - will be charged a simple annual interest rate (APR) without additional fees and changes for using an overdraft.
According to the FCA, the majority of overdraft users will be better off or see no change when the new rules come into effect.
If you borrow £100 through an unarranged overdraft, it's expected you would now pay less than 10p per day, instead of the current typical amount of £5 per day. The banks and building societies who have announced new rates already have set them between 19-40%. Check with your bank to find out what your new rate will be.
What should you do next?
If you’re regularly in your overdraft, you may want to consider other ways of borrowing money, such as 0% interest or lower interest credit cards. You could also look into personal loans at lower rates than what your bank charges for an overdraft.
Start building a safety net! Use Neyber’s debt calculator to see where you stand and help you set out a plan to get out of the borrowing spiral.
Since banks will be charging a simple annual interest rate on your overdraft, this should make comparing accounts easier. Do your research once all the interest rates have been announced to find out which account works best for you. You may find that another bank now suits your needs better.
Check what rates your banking providers or building societies will be charging, and if you’re affected. The FCA has a handy chart to see what the new fee changes are at major banks in comparison to current fees. Otherwise, check your bank’s website or contact them directly.
Take Neyber’s Financial Health Score to see where you stand financially and get personalised recommendations on what you should do next.
Important: This content is for guidance and educational purposes only and is generic in nature. Salary Finance Limited (trading as Neyber) does not offer regulated financial advice. Please seek independent financial advice.