Overdrafts: The hidden expense

Overdrafts: The hidden expense
Written by Sarah Banks
Published on 4th July 2017
Updated on 3rd December 2019
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Thinking of using your overdraft?

Dipped into your overdraft recently? You may be surprised to know it’s more expensive than using a payday loan.

In the past, payday loans (now referred to as high-cost short-term loans ), have had a bad reputation. Lenders used scare tactics and piled on the charges if customers were late or missed their payments, which meant that many spiralled into debt. Following new legislation, high-cost short-term loans now have caps on the amount they can charge and generally, as long as they are used with caution, can be used to cover you if you’re short of funds.

Not many consumers are aware of the changes and would still run a mile from taking out a payday loan if a quick injection of cash was needed. Instead, they might dip into their overdrafts, sometimes unauthorised, thinking that it’s the best option - however, the latest figures would suggest that this is actually significantly more expensive.

There have been claims that high street banks, such as Barclays, Santander, Lloyds, TSB, RBS, Natwest, HSBC and Halifax, are taking advantage of customers with some receiving as much as £180 in charges, simply for dipping £100 into the red for 30 days over two billing periods. These charges are an astounding 7.5 times higher than those allowed for a payday loan.

Bank account terms and conditions change all the time. Costs and benefits can go up and down, so stay on top of the market by comparing bank accounts on Choose Wisely.

Who are the main culprits?

If you bank with Natwest you’re in for a shock as they are the most expensive at £180, with Lloyds, TSB and Santander follow closely behind at £160. Although these banks may have alerts set up to notify customers that they’re going over their agreed limit, if consumers need the cash, they may disregard these.

Some of the big banks have released statements to highlight that overdrafts are not for long-term borrowing, they’re for occasional spend to cover essentials and it is important that customers keep this in mind, as any borrowed finance needs to be used with caution.

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What to do next?

If you do need to use your overdraft but worry that it might take you over the limit, it’s best to get in contact with your bank to discuss your options. Some may offer you a higher authorised overdraft limit to cover you, however, this may depend on your creditworthiness and reliability as a customer - if you’ve had overdraft problems in the past, or your credit isn’t in great shape, then this may be unlikely.

They do say that prevention is better than the cure, so planning for the unexpected will help you in the long term. Set money aside in your budget each month in a rainy day fund to cover things like broken boilers, new tyres or anything that might be too expensive to pay out of your monthly disposable income.

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Sarah Banks
Written by
Sarah Banks
Finance writer at Choose Wisely

Sarah joined Choose Wisely in July 2017, whilst still studying for her degree. Learning the ropes across different departments in the business including Customer Service Advisor for a period of time- making her the company’s closest link to their consumers experience with their finances.