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Most high street banks have exorbitant rates set for unplanned overdraft, with short term borrowing costing over 12 times more than the charges of loan companies like Wonga.
Most high street banks have exorbitant rates set for unplanned overdraft, with short term borrowing costing over 12 times more than the charges of loan companies like Wonga. Photograph: Mark Hope/Alamy
Most high street banks have exorbitant rates set for unplanned overdraft, with short term borrowing costing over 12 times more than the charges of loan companies like Wonga. Photograph: Mark Hope/Alamy

Unplanned overdraft fees 'four times costlier than payday loans'

This article is more than 7 years old

Which? calls for a cap on ‘punitive’ charges after research shows bank rates harming vulnerable customers



Going overdrawn on a current account without permission can now be up to four times more costly than taking out a payday loan, according to new research from consumer body Which?

The organisation said its findings showed that regulators needed to crack down on “punitive” unauthorised overdraft charges that were causing harm to vulnerable customers.

Which? suggested that unauthorised overdrafts were now more expensive than payday loans, which are notorious for their high interest rates: Wonga charges a representative APR of 1,509%.

However, the UK’s largest consumer body said unauthorised overdrafts can be “much more costly” when people are borrowing for the short term – up to 12.5 times more if the period in question is just 24 hours.

This is linked to the fact that in January 2015 the Financial Conduct Authority (FCA) introduced price caps on payday loans, with interest and fees capped at 0.8% per day of the amount borrowed.

This means someone taking out a £100 payday loan for 28 days and paying it back on time will never pay more than £22.40 in fees and charges.

However, with no such caps in the current account market, if that individual had borrowed the same amount via a high street bank’s unauthorised overdraft, he or she would face a bill of £90 at NatWest and its parent, Royal Bank of Scotland.

With NatWest and RBS, if a customer goes into unauthorised overdraft by more than £10, they are charged a fee of £6 for each day they remain in that position, capped at £90 per “charging period”. A charging period runs from month to month.

With charging structures differing from bank to bank, there is a wide variation in the amounts charged when customers go into the red without permission. At Barclays the equivalent cost would be £29.75, whereas at Santander it would be £67, said Which? Meanwhile, Lloyds, HSBC and TSB would each charge £80.

A spokeswoman for Which? said the charges could be even higher if interest payments or possible unpaid item fees were included, or the money was borrowed over two monthly charging periods, because the maximum charge related to the charging period and not how long the money was borrowed for.

Which? said that when it came to borrowing £100 for just one day, the charges imposed by some high street banks were 12.5 times higher than the amounts payday lenders were allowed to charge. The FCA cap for one day would be 80p, compared with £10 for the Lloyds classic account.

The Which? spokeswoman said it was calling for unauthorised overdraft fees to be set at the same level as authorised overdraft charges, and for the FCA to review overdraft charges in the context of other forms of credit.

Alex Neill, Which? director of policy and campaigns, said: “People with a shortfall in their finances can face much higher charges from some of the big high street banks than they would from payday loan companies. The regulator has shown it’s prepared to take tough action to stamp out unscrupulous practices in the payday loans market, and must now tackle punitive unarranged overdraft charges that cause significant harm to some of the most vulnerable customers.”

RBS’s response to Which? was that it encouraged all its customers to get in touch if they were going to enter unarranged overdraft territory, regardless of the amount or the length of time. It added: “This is an expensive method of borrowing, and there could be a number of alternative solutions, such as putting an arranged overdraft in place, and the costs are considerably less. Our Act Now Alert service would alert the customer to being in unarranged borrowing and that they should take action.”

Lloyds’s response was that “the vast majority” of its customers who used their overdraft remained within their planned limit in an average month.

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