Overdraft charges more expensive than payday loans

Which? is calling for a crackdown on unarranged overdraft charges as we find that consumers face higher charges for using an unarranged overdraft than they would if they took out a payday loan.

New Which? research finds that consumers needing as little as £100 could be charged up to 12.5 times more by major high street banks than the Financial Conduct Authority (FCA) allows payday loan companies to charge, when borrowing the same amount for the same period.

In January 2015, the FCA introduced a cap on high cost short-term credit to protect consumers from excessive fees charged by payday loan companies, but we found unarranged overdrafts can be much more costly when people are borrowing for the short-term.

Which? compared the cost of borrowing £100 for 28 days and found that charges at some high street banks were as much as £90, up to four times higher than the maximum charges of £22.40 on a payday loan. The charges could be even higher if interest payments or possible unpaid item fees are included, or the money is borrowed over two bank monthly charging periods, because the maximum charge relates to the bank’s monthly charging period and not the borrowing period.

Following its review of retail banking in the UK, the Competition and Markets Authority (CMA) has published a number of provisional remedies to tackle overdraft charges, including a requirement for banks to have a monthly maximum charge for unarranged overdraft usage. However, Which? has criticised this and stated it is unlikely to make much of a difference because banks typically already put caps on charges and it does not address the overall level of fees.

Which? is calling for unarranged overdraft charges to be set at the same level as arranged overdraft charges and for the FCA to review overdraft charges in the context of other forms of credit and crackdown on punitive fees.

Alex Neill, 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.”


Notes to Editors

  1. Research: We reviewed the unplanned overdraft charges levied by the named banks in June 2016, on fee-free accounts with no minimum monthly payment. We assumed the customer had already used up a £1,000 planned overdraft facility, and included all additional daily or monthly charges that applied as a result of the the emergency borrowing. We did not include charges for the planned overdraft, interest, or charges that relate to specific account usage, such as paid or unpaid item charges.

  2. We looked at the following accounts: Lloyds Classic Account, RBS Select Account, Barclays Bank Account, HSBC Bank Account, Santander Everyday Current Account, Nationwide FlexAccount and TSB Classic Account. The research found:

Nationwide FlexAccount does not charge a fixed fee, but charges £15 per transaction outside arranged facilities, which is capped at £75.


  1. Borrowing charges from some high street banks are 12.5 times higher than the FCA cap if consumers borrow £100 for one day. The FCA cap for one day is £0.80, compared to £10 for the Lloyds Classic Account or TSB Classic Account.

  2. The research assumes that the borrowing takes place within a single bank monthly charging period. If usage of the unarranged overdraft began in one charging period and continued into the next then borrowing costs could be as high as double those shown.

  3. The CMA proposes several remedies targeted at overdrafts. One of these is to require personal current account providers to introduce a monthly maximum charge (MMC) covering all unarranged overdraft charges (including debit interest). Disclosure of the MMC should be no less prominent than other overdraft charges, but the level of the MMC will be set by each PCA provider and may be different for each of its PCAs.

  4. Barclays response: “Significant changes to our overdraft structure and charges were implemented in June 2014. We introduced new text alerts, grace periods and buffer zones to help customers manage their finances and avoid fees.” Barclays does not provide unarranged overdrafts. Any emergency borrowing must be pre-agreed.

  5. HSBC response: “We would always encourage customers to contact us if they need to arrange a formal overdraft or an extension to their existing formal limit. Where customers do contact us first the charges would be limited to debit interest only and for our Bank Account customers the total charge for a debt of £100 for 28 days would be £1.40.”

  6. Lloyds response: “Unplanned overdrafts are designed for occasional spend rather than long-term borrowing, and being in an unplanned position for a sustained amount of time is not representative of typical current account behaviour. The vast majority of our customers who use their overdraft remain within their planned limit in an average month, and the process to agree a new or revised limit is quick and simple.”

  7. Nationwide response: “We would always encourage our customers to pre-arrange a suitable overdraft to ensure that any borrowing on their current account fully meets their needs. Only a small number of our customers use unarranged overdrafts, and we look to work with and support customers to ensure they have accounts which fully meet their day-to-day financial needs.” Nationwide will waive fees the first time a customer contacts them after inadvertently going into their overdraft.

  8. RBS response: “We encourage all of our customers to contact us if they are going to enter Unarranged overdraft regardless of the amount or the length of time. 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.”

  9. Santander response: “We provide a range of services to help our customers manage their money closely. These include online and mobile banking, email and text alerts which can be set to warn of an overdraft or unpaid transaction, a £12 overdraft buffer, a grace period of until 4pm to clear an overdrawn balance, and 22 days’ notice of account charges.”

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