Borrowing money by going overdrawn will soon cost twice as much as a credit card, and ten times as much as some personal loans.
Banks look set to fix an interest rate of almost 40% on all overdrafts. They are taking this step because the Financial Conduct Authority has ordered them to change the way they charge for overdrafts from 6 April.
Daily or monthly fees will be banned and in future there can be no extra costs for an unauthorised overdraft which is taken without permission.
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As a result, most banks have decided to charge an interest rate of 39.9% APR on an overdraft. That is more than double the rates charged at the moment, partly to recover some of the daily charges they must now stop.
Although doubling the interest charged on overdrafts sounds very dramatic – and expensive – the end of daily or monthly fees will mean most people with overdrafts will see the cost come down. That will be especially true for those with unarranged overdrafts.
In the past, going a few pounds or more overdrawn without permission, or a few pounds over an arranged overdraft limit, could incur a charge of £5 a day.
The changes will start over the next couple of months. The way some banks are calculating the 39.9% will squeeze every penny from their customers.
For example, Santander’s standard overdraft rate will be 39.9%, worked out as 2.84% a month, the very highest it can charge while keeping the APR below 40%.
At the same time, the bank is scrapping its daily charge, ranging from £1 for overdrafts below £2,000 to £3 for those over £3,000, and the £10 charge for a bounced payment or one that sends a customer overdrawn.
There will be no charge at all for unauthorised overdrafts. As a result, most customers will pay less. But a few will pay more. For example, those with an arranged overdraft of £1,065 to £1,999, or over about £3,200.
Overall, banks made £2.4 billion a year from overdrafts, a third of that from the 14 million of us who use an unarranged overdraft. This highly profitable business will now be slashed, but expect other charges to rise and savings rates to fall to replace it.