How to Repay Your Overdraft Before Rates Change – Which One? News
Changes to how banks charge for unarranged overdrafts could see borrowers who regularly rely on an arranged overdraft face higher fees of up to 40% from April.
Under the new rules, banks will have to charge the same interest rate for arranged and unarranged loans.
This means that vulnerable customers who slip into the red without a pre-agreed buffer will benefit from significantly lower fees. However, those relying on an arranged overdraft could end up paying more.
Here we explain how the new rules will work and offer advice on how to pay off your overdraft before rates rise.
Unarranged vs Arranged: What’s the Difference?
A overdraft arranged is agreed in advance with your bank. This allows your balance to drop to a set amount below zero (eg £250). Some arranged overdrafts are provided free of charge, while others charge a fixed interest rate.
A discovered unarranged is when you are overdrawn beyond your agreed limit, or your balance drops below zero and you don’t have an arranged overdraft in place. Some banks give customers a small “buffer” (eg £25 or £50) which you are entitled to before interest is charged.
Why are overdraft fees changing?
In june last yearthe Financial Conduct Authority (FCA) has confirmed that new rules on how banks charge for overdrafts will be introduced from April 2020.
It came after his investigation revealed a ‘dysfunctional’ market with vulnerable customers facing confusing fees and exorbitant charges for using unarranged overdrafts.
The new rules will prohibit fixed daily and monthly overdraft fees and prevent banks from charging higher fees for unarranged overdrafts.
Who will benefit from the changes?
The FCA reports that seven out of 10 borrowers will either be better or see no change at their expense.
He says the best news is for those who regularly use unarranged overdraft, for whom the cost of borrowing £100 could drop from £5 a day to less than 10 pence a day.
Which? welcomed the steps taken by the FCA to improve the unarranged overdraft market, which we have long considered unfair to the most vulnerable customers.
How much will banks charge for overdrafts?
Almost all major banks (except Tesco Bank) have now detailed their new rates.
Many have set fees at a flat rate just below 40%, while others will charge different rates depending on the customer’s account type or credit history.
The table below shows how much banks will charge for overdrafts from April.
Overdraft change review
In recent weeks, banks have come under fire for setting their new rates at around 40%, well above their current arranged overdraft rates.
These higher rates will mean that those who borrow using an arranged overdraft for long periods of time will pay more.
For example, the FCA says someone borrowing £500 under an arranged overdraft with HSBC for 30 days will see their charges drop from £7.52 to £13.29.
Those who rely longer on larger authorized overdrafts face the highest fees.
The personal finance website Money Saving Expert says a borrower with an authorized overdraft of £2,000 could see their annual charges drop from £180 to £680.
FCA seeks clarification from banks
The uniformity of the new rates leaves few options for customers looking to upgrade to a better deal.
On January 28, the FCA wrote to banks asking them to explain their overdraft pricing decisions and explain the steps they will take to help customers disadvantaged by the changes.
Reacting to the news, Which? Money’s Gareth Shaw said: ‘Changes introduced to clarify overdraft fees and charges and protect the most vulnerable must also allow customers to shop around.
“The current lack of competition on overdraft pricing is disappointing, so it is only fair that the regulator takes a closer look.
“Banks also need to be clear about how they communicate the changes to customers and help more of them choose the right kind of credit product for their situation.”
How to get out of your overdraft in 2020
If you’re looking to get out of your overdraft before the changes take effect, there are a number of options you can look at.
1) Use your savings or reduce debt
If you have savingsit may be a good idea to use them to pay off your overdraft.
This is because the interest you will pay on your loan will be much better than what you will get on your savings.
If you can’t pay off the overdraft all at once, consider having a plan in place to pay off some of the debt each month.
Before spending your savings on your overdraft, think about your overall financial situation and be sure to keep an emergency fund for unexpected expenses.
2) Use a 0% money transfer credit card
The FCA and the Money and Pensions Service have suggested that people who use arranged overdrafts for long periods are better off finding other methods of credit.
For some, a 0% credit card money transfer could be a viable option. These cards allow you to transfer money directly to your bank account and clear your overdraft.
They are usually offered interest-free for a number of months (the longest period currently available is 28 months), after which interest kicks in.
- Allows you to clear your overdraft immediately.
- Gives you time to develop a plan to pay off the debt without incurring interest.
- The longer interest-free terms are generally only available to people with the best credit ratings. There is no guarantee that you will get the number of months stated on the provider’s website.
- Many of the longer terms come with 3-4% transfer fees.
- You will need to pay off the debt before the interest-free period ends, as rates can be high once the interest kicks in.
- Learn more: 0% Money Transfer Cards Explained
3) Consider a personal loan – but only if you can get a low rate
In theory, a personal loan is one of the cheapest ways to pay off a large overdraft, but in reality, the biggest banks don’t often offer their best rates on small loans.
For example, Halifax offers rates from just 3.5% APR on loans over £7,500, but its rates start at 28.9% APR on loans over £2,000.
Currently, the best rates on offer for £2,000 loans are around 12-13%.
- Allows you to clear the overdraft immediately.
- Fixing monthly payments can help those who lack discipline.
- The best rates are generally not available on small loans.
- There is no guarantee that you will get the rate listed on the provider’s website.
- Learn more: personal loans explained
4) Get advice from an expert
If you’re worried about paying off your overdraft or worried about your debts, consider consulting a professional.
As a first port of call, your bank or building society should be able to advise you on the changes and help you assess your options.
If you prefer to obtain advice from an impartial third party, the charity Stage change offers free help to people with debt problems.
How to avoid using your overdraft in the future
Once you’ve settled your overdraft, sit down and take a close look at your finances, then put a plan in place to avoid falling into it in the future.
The nuclear option here is to simply close the account in question or remove its overdraft facility.
Ultimately, however, it’s best to find the underlying cause of your difficulties.
To start, consider making a simple budget for each month.
Even the smallest changes can make a difference, whether it’s transferring pocket money to a prepaid card or reducing weekly takeout.