Convenient Bank Overdrafts Borrowing – But at What Cost?

By: MoneyFacts

Borrowing from current account overdrafts is fast and convenient, but the cost of doing so has escalated in recent years, leaving many consumers to pay over the odds for their quick borrowing fix.

Research from Moneyfacts.co.uk shows that the monthly cost of borrowing fees, based on the average authorised overdraft charging a usage fee, has hit an all-time high of £6.88, three times as much as that charged back in 2009 (£2.20*). This may look like a small cost, but over a year this adds up to a hefty £82.56, and that’s without factoring in interest charges. Indeed, the average authorised interest charged on overdrafts has also risen, albeit to a lesser extent, and now stands at 13.89%, up from 12.40% in 2009, meaning borrowing from an authorised overdraft is becoming an increasingly pricey option.

Consumers who dip into their unauthorised overdraft are even worse off as they are hit by the highest fees - the average fee of an unauthorised overdraft has now 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, but the sharp increase in fees suggests that lenders are increasingly adapting their account structure to charge flat fees instead of interest, which could work out as being more costly for the borrower.

Rachel Springall, Finance Expert at Moneyfacts.co.uk, said:

“Part of an overdraft’s appeal is its simplicity, but in many cases consumers are paying a high price for it - more and more current account providers are beginning to charge usage fees, and consumers can end up paying more.

“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 account, so many consumers may decide to just stay put rather than deal with the hassle.

“However, the investigation into the retail banking sector by the Competition and Markets Authority (CMA) is expected to come to a close this year, which could signal a dramatic change in the market, depending on what is 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. 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.”

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