Overdrafts

Arranged versus unarranged overdrafts

An arranged overdraft is a borrowing limit your bank agrees with you in advance. An unarranged overdraft happens when you spend beyond your balance (or beyond your arranged limit) without agreeing it first. Banks can also refuse payments that would take you into an unarranged overdraft.

Both are borrowing and both cost money, but they are now charged in the same way rather than through the separate fees that used to make unarranged borrowing especially expensive.

How overdraft charges changed

The FCA reformed overdraft pricing, with the main rules taking effect on 6 April 2020. Banks must now charge for overdrafts using a single annual interest rate, expressed as an APR so you can compare it with other borrowing. They can no longer charge fixed daily or monthly fees, and they cannot charge more for an unarranged overdraft than for an arranged one.

• Overdraft costs are shown as an annual interest rate and an APR
• Fixed daily and monthly overdraft fees were removed
• Unarranged overdrafts cannot cost more than arranged ones

The real cost of an overdraft

Even as a single interest rate, overdraft borrowing can be expensive — some headline rates are considerably higher than on other forms of credit. An overdraft can be useful as a short-term buffer, but relying on it month after month is usually a sign it would be cheaper to look at another option or to seek free money guidance.

Reducing the cost

If you regularly use your overdraft, it is worth checking whether a cheaper form of borrowing would cost less, and whether your bank offers a fee-free buffer or a formal repayment plan. If you are struggling, your bank should treat you fairly and discuss support — you do not have to wait until you miss payments to ask.