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Unarranged overdraft fees that cost more than a payday loan


When people face a shortfall in their finances, they probably turn to their bank first. But it might surprise you to know we’ve found unarranged overdrafts that cost more than a payday loan.

Have you ever been in the situation where this month’s budget is looking fairly rosy just up to the moment when the car fails its MOT and you’re hit with a huge unexpected bill for repairs. In this situation, dipping into an unarranged overdraft can be costlier than you might expect.

Not everyone has a savings account buffer to help them deal with the unexpected costs, and these people face much higher charges from some high-street banks for using an unarranged overdraft than they would if they took out a payday loan.

When we took a look at the cost of borrowing £100 for 28 days what we found was that charges from some high street banks were as high as £90. This is up to four times higher than the maximum allowed charges of £22.40 on a payday loan.

Spiralling costs

But that’s only half the story. You’ve been sharing your experiences with surprise charges here on Which? Conversation.

Overdraft charges can add up quickly, as Peter Lloyd knows all too well:

‘I went over the overdraft limit when the bank put on its monthly charge, it cost me about £100 in total. They finally sent me a letter telling me of the penalties after the full seven days’ charges had been added; if they can let you know then, why not earlier? If they had notified me on the internet, I could have avoided all the charges. What is internet banking for?’

Matthew shared his feelings of hopelessness:

‘I’ve been stuck in an overdraft trap for a long time now. The charges mean I can never get out of it.’

Unreasonable and unexpected

Charges for an overdraft can seem punitive and unfair, as experienced by J Kelly:

‘The first time I went overdrawn, I wasn’t aware I had one. I was told the new card worked the same as the old card, but that this one was applicable for online banking. So I was quite surprised when I first unknowingly went overdrawn by about 11p, then got a statement a few days later for a £15 charge at the time. It hardly seems fair for such a petty amount.’

And as Nick Fletcher explains, there are vulnerable people being exploited by these charges too:

‘My son in his first years after university whilst still jobless and even today can match several dozen times that story of £90 fee for £2 overdrawn. In the world of banking it is often the poorest who end up subsidising the well-off. This reflects the totally distorted view of life and living that most banks have entrenched within their mean and nasty financial policies and objectives.’

Calling for fairer charges

We’re calling for a crackdown on unarranged overdraft charges as we find that consumers who need money in an emergency face higher charges for using an unarranged overdraft than they would if they took out a payday loan. We think unarranged overdraft charges should be set at the same level as arranged overdraft charges.

The Financial Conduct Authority has shown it’s prepared to take tough action to stamp out unscrupulous practices in the payday loans market, and it must now act to tackle punitive unarranged overdraft charges.

Have you been surprised by an unexpected charge for an unarranged overdraft?

Do you know how much your overdraft fees are?

No, I have no idea what the cost would be (45%, 2,553 Votes)

Yes, I do know how much I'd be charged (36%, 2,048 Votes)

I'm not sure (20%, 1,131 Votes)

Total Voters: 5,732

Loading ... Loading ...

Calling for fairer charges for unarranged overdraft fees speaks to me rather like closing the gate after the horse has bolted. The main criteria as far as I am concerned goes much deeper into the reasons why fairer charges are necessary in the first place. The following website for anyone curious enough to want answers can shed some light on and maybe appease some of the apparent frustration that has built up during this topic and demonstrates how both emotional and cognitive forces can stimulate overspending with credit.

@ psychology today.com – Why We Overspend With Chedit – Scott Rick PhD. 22June2013

The salient overspending problem appears to lie with the way the mind interprets the difference between paying cash or credit and whether you are a spender or a saver and how we as a nation have developed a dependency on living now and paying later. There’s more @ spectrum.mit.edu The Psychology of Spending.

It could be argued of course “this is the norm” but when delving a little deeper you soon begin to realise to what extent we depend upon and have been won over by the large financial institutions who, as Ian has posted above, made £1.2bn in charges last year.

Beryl, I haven’t yet looked at this link but found years ago that having a credit card changed my attitude to spending somewhat. I am cautious by nature but credit of any kind that makes a purchase easier does tempt us into making a more spur-of-the-moment or more expensive purchase, whereas parting with cash from my wallet made me think harder – do I really need to buy this? And, of course, the cash was real money I had saved up. A cheque book had a similar effect. Now I use a credit card mainly for free credit; I pay it off in full every month. The upside of credit cards is convenience, particularly with the internet. But they require self control, and whilst we can blame the banks for introducing them it is we who use them.

We use debt all the time. The classic is the mortgage, which often gets overlooked; who could possibly aspire to a home of their own without incurring debt? But if we miss enough payments we lose our home – we cannot normally blame the lender when that happens.

I cannot understand why, when people have the opportunity to avoid the high charges, they don’t arrange an overdraft facility. particularly if they’ve once had their fingers burnt. That is surely the place to start. If they are not a good credit risk then the bank should simply not allow them to overdraw. Is that not a simple solution?

I enjoyed reading several articles on psychology today.com, which are easy to understand and relate to.

I am reminded of a friend who died ten years ago. I got to know him because of a shared hobby interest. He was an avid collector and had a bigger collection of OS maps than most bookshops. That made some sense because he did a lot of travelling and used maps regularly, but somewhat eccentrically he also had a large CD collection long before he had a CD player, largely thanks to Britannia Music and other mail order companies that existed at the time. He also had many box sets of video tapes but could not afford to buy a player that worked reliably. At least he could enjoy his growing book collection, and he was an avid reader. He spent a fortune on car repairs and would eventually buy another old car. He would never fill up the tank of his car and frequently ran out of petrol. In most other respects he was normal person and helpful to me and his many other friends. He and his wife had savings but he was paying substantial interest to his credit card companies or bank every month. He knew that if he stopped spending money on unnecessary purchases for a few months he could clear his debts and have more money to spend. It never happened.

Wavechange, I was very interested to read about your friend who was obviously fulfilling a deep seated need of his own by gaining material pleasure from his collections. He was, I would surmise, a spender who was extremely fortunate to have a wife who was a saver. I was once married to an extrovert spender whose hobby was collecting credit cards! When one card had reached its spending limit, another would be used to enable him to continue his spending and his very expensive lifestyle , and then another ad infinitum………

I recall that he did pay the household bills because I remember him saying that he waited until the red ones arrived. His wife worked for a local hospice and I don’t know if she had an income. It looked like continuous but controlled debt. He gained pleasure from his maps and books but much of the other stuff cluttered up their home and garage. When I first knew him, everything was meticulously organised, especially his extensive photo collection, but that went downhill as his health deteriorated. I know materialistic people with expensive cars and boats but he was not one of them. He had a decent house in a nice area, and I assume that he had just become accustomed to living in debt. Improvements such as replacement windows were done a couple at a time – hardly a good way of getting value for money.

I vaguely know a couple of other people who have struggled financially. One couple was forced to sell their house when they could not make ends meet and they now live in rental property on benefits. I know of someone else who had little income and was living in rental property. She told me that she had become bankrupt and looked forward to having a fresh start. Having heard other tales of people I don’t know, I’m convinced that debt problems are many and varied. Whether they are genuine hard luck problems or simply lazy people who don’t manage their money, I don’t think they deserve high interest charges so that the rest of us can enjoy free banking. Many of us are accustomed to paying nothing for banking services even if we keep a low credit balance. I wonder if anyone would like to justify this.

I don’t think it is high interest charges – my bank charges the same rate whether the overdraft is arranged or not. It is the fixed charges attached to unarranged overdrafts that seem to cause the most criticism, particularly when the overdraft is small.

My plea remains – encourage all who qualify to make the sensible move and arrange an overdraft facility if at any time it is possible you will overdraw. Then the other charges are irrelevant to you.

Just in case it is a factor, perhaps we should campaign to put an end to high interest charges. If the banks can provide evidence that their charges are reasonable I will reconsider but for the time being I will assume that they are being greedy. If we could do a Freedom of Information request we could establish whether the banks are being greedy or whether this is a popular myth. I have no reason to criticise my bank over how it handles my current account.

If you mean % interest these are clearly shown in the banks I have looked at and are somewhere around 17-19%, about the same as credit cards are for many. For short term emergency borrowing do you see these as unreasonable? If you want longer-term borrowing and more money then it would be sensible to take out a loan. My bank currently, on the web, shows an interest rate APR 4.6%.

We need perhaps to devote more effort to ensuring people have information upon which to make financial decisions, but looking at you bank’s website, and talking to them, is a good way to start.

I appreciate this but what I don’t know is what profit the banks are making. The fact that we have free banking suggests that those in the red are being exploited by the banks. I don’t know any other commercial organisation that would provide many of their customers with a range of free services. Do you?

To be viable, all companies must obviously make a profit, but I don’t approve of exploitation of some customers for the benefit of others. Would it not be fairer if you and I paid for banking services? Charities and businesses do. I don’t expect my suggestion would be popular, but at least it is fair.

I am not sure of the extent of your friends hoarding
practices Wavechange but excessive hoarding is an offshoot of OCD. You can read more about it @. psychologytoday.com
The Psychology Behind Hoarding.

It is possible to take out Mortgage Payment Protection (MPPI) Insurance in the event of accidents, illness, redundancy etc. with protection for up to one year to tide you over. My son-in-law took advantage of this for about 3 months until he found another job. With today’s uncertain job prospects this seems a wise thing to do.
To have to relinquish your home through debt must be very painful.

It must be very difficult for couples when one partner has
a spending problem and constantly goes overdrawn. I still maintain keeping a small contingency is the best answer as opposed to going over into the red and being encumbered with interest whether it be either at a high or low rate Malcolm. A little amount put by every month can soon add up; a small price to pay for peace of mind. I am very relieved that I don’t have that worry anymore.

I wouldn’t mind paying for banking. It is a valuable service and with my banks it is a good service.

Credit cards are free, paid for by those who borrow or default and the retailers. I get up to 2 months free credit.

I believe some electric car charging points are free.

I get 2 hours free parking paid for by those who stay longer or pay penalties.

Nothing is free really, though, is it. Your deposit in a current account is invested by the bank to make money. It just may not reflect the real cost – like you pay the same council tax even if you don’t use all their facilities like schools and sports centres.

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I would be prepared to pay too, providing that charges had some relation to costs of servicing a current account and used to decrease interest rates, and not as an excuse to generate further profits. I had expected charges to be introduced when interest rates fell to current levels, though the banks would not have been popular if they had. At least with services funded by council tax, everyone has the opportunity of using services.

I don’t understand why interest rates are so high for credit cards given that the retailers pay substantial charges for the service – which is of course passed on in higher costs of products and services for consumers, even those who don’t have a credit card.

Although I frequently mention fairness, I’m not a very benevolent person. I f just feel that the gap between rich and poor has become too wide, yet have little time for those who could pull their weight but choose to exploit the benefits system.

I see the main problem not to be the gap (although I envy those highly paid people in all walks of life, whether business, charities, public life, entertainers, sports, but this is and always has been the case) but the level of the “poor” by which I mean their ability to lead a reasonable existence. Absolute poverty is far less prevalent than it used to be. But can you stop James Dyson selling highly price appliances and becoming a billionaire, golfers and footballers making millions, people being fortunate with their investments or winning the lottery………… Where I have more of a problem is the concept that in public life and business we must pay more and more to attract the right people – who often turn out not to be right.

I’m a bit of a hoarder too but it doesn’t cost me any money

I keep telling you Duncan there’s a book in there……………..get writing!

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This comment was removed at the request of the user

You are either a spender or a saver Duncan. Some people gain pleasure from watching their savings grow and others gain as much pleasure from spending. It’s the latter who the banks love most, although if you think about it they are in a win win situation, holding on to customers savings whilst paying very little back in interest and charging high interest rates on spenders unarranged overdrafts. I have always been a saver. I never get into debt and always pay my credit card on time and I own my own home like Malcolm, who by all accounts I would say is a saver too.

Most people need a mortgage at some time, but this topic relates more to people’s spending habits and their inability to manage their own finances. There are a number of reasons why people spend more money than they can afford and the credit card, although a blessing for some is a curse for others. Problems arise when people develop an unconscious dependency and reliance upon the banks which causes a strong reaction when banks demand huge fines when they overstep the mark. Paradoxically, it’s the banks who create that dependency in the first place which affords them the enormous power they have over people.

There are people who are addicted to spending Malcolm and one of the main characteristics of addiction is denial and their denial can be extremely hard to break until they run out of excuses or ‘friends’ who have refused to lend them any more money. Banks are well aware of this and have ways of dealing with it, but you are much less likely to arrange an overdraft facility if you think you don’t need it!

The best way to deal with unfair bank charges is to keep a contingency to allow for the unexpected and basically become smarter than the banks by examining your own financial shortcomings and by always keeping one step ahead of them. Pushing for leniency in overdraft charges encourages people to spend more and sets up a downward spiral of ever increasing debt.

The credit card has a lot to answer for because it is so easy to spend money you don’t have. I have always paid off my credit cards in good time to avoid interest charges. On a couple of occasions I enquired about paying credit card bills by direct debit, but was told that this was not possible. About five years ago I was very ill and forgot about my bills. The next bill included interest charges, so I phoned the company and said that I wanted to pay by direct debit or I would stop using my card, which I have had since the 70s. Now my cards are paid by direct debit.

Maybe it would help if more people payed their credit cards off automatically by direct debit to avoid accumulating debt resulting from carelessness or temptation. On the other hand, it might just mean more risk of overdraft on current accounts.

I don’t get why credit cards are anything but scary. Spend now in the hope of having money later to pay it off? No thanks. But then shopping is not therapy for me.

I do have a credit card though. Some years ago, I had a £1000 bill to pay in January and I knew I would receive money in June. So I got a card will 0% on purchases for six months. I paid the bill out of my salary to avoid the credit card surcharge and paid for all my regular purchases for a month or two on on the credit card. When I got my money in June, I paid the card off and I haven’t used it for years. Still has to be the best loan l ever took out.

I did wonder what I was letting myself in for when I got my first credit card, but as long as you know that you are going to be able to pay the credit card bill, it should not be scary. If you continue to pay off your bills on time then you have the benefit of an interest-free period.

My biggest financial concerns have been the risk of loss of income if I was made redundant or was unable to work. Many are on contracts or frequently at risk of redundancy. That does not help if you have a mortgage, a car loan or a family to support.

Perhaps it would help if the credit card companies set low credit limits and only raised them for those who are managing their account well. But like the banks, it boosts their profits if customers are in debt.

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Duncan, the key is to psychoanalyse yourself and your own spending habits! You don’t necessarily have to avoid contact with people to be eccentric but you are more likely to be extrovert to develop a herd instinct, since extroverts are by their very nature under stimulated they
are more likely to go out and seek other people’s company to provide extra stimulus.

One of the most common phrases people use to justify their spending is “well it must be OK because everybody does it.” A simple but classic example of the herd instinct Wavechange. All attempts to convince them that “everybody doesn’t do it” will most probably invoke a reaction such as you are the odd one out for not doing it!

A little eccentricity doesn’t go amiss occasionally as it can sometimes add a little spice to people’s lives, especially in the present economic uncertainty, but I am in danger of veering off topic so will bow out now

PS. The BoE have just announced interest rates to remain at 0.5%.

“Everybody does it” is a good enough reason to question whether to join in. Popularity can push up prices (attending football matches and Wimbledon, or pop music concerts) or competition can bring down prices (garden barbecue equipment). If you don’t join in when you are younger you can feel left out, but once you have found others that share your interests then you will be well accepted.

D’accord – an attribute that comes about with maturity Wavechange.

There seems to be a general consensus that debt is a dangerous thing and we have far too much of it. I am sure therefore that people would be very surprised to learn that our whole money system is built on debt to the extent that nearly all money is created by commercial banks, from scratch, as numbers in borrowers’ deposit accounts, when they make loans.
We have to rent our money supply off the banks by paying interest on 95 % of every pound in circulation. If we all paid off our debts and refused to take out any more there would be no money (apart from a tiny amount of cash.)

I only wish Which would do a feature on how our money system works. We can’t get meaningful reform of banks until we change the way money comes into existence. Are you listening Which? Positive Money would love to hear from you.

I was charged £17 for having £13 less than the £4000 I am supposed to have in my account for one day. When I rang and complained a very helpful advisor agreed to refund the amount “as I had been a client for a long time”

Congratulations Sue glad to hear your efforts paid off. Proof that Banks do have human beings working for them after all.

i was told there is a way to claim the bank charges back,can anyone help plz

If you believe that charges have been applied unfairly, incorrectly or if they were not in your contract then I’d first contact the bank with your complaint. Some advice here:

Santander 123 increased account fees by 150% in January but also Credit card annual fee by 50% and flate rate ‘quasi- cash fee is now £3 per transaction for an online service with minimal human intervention. These are outrageous increases and typical of an ‘apathetic marketing’ campaign to draw customers in then fleece them as they rarely move again

May be a good idea to move to another bank?

I think we saw this coming when Santander launched their 123 account. It attracted a huge number of new customers who might now leave in droves. If these changes affect them, they would be silly to remain attached to Santander when other options are available.

I personally do my banking with Barclays and i must say to be fair they’re better than most banks i could name and shame.

TSB bank & Nationwide mutual building society offer the best rewards and interest on current and savings accounts at the mo, so I’d advise you all to swap over to them asap as the rest are just a bunch of RIP OFF MERCHANTS ! Also on the continent one can get ones money out after 24 hours from a transferred cheque to one’s account, here in UK it takes 5x working days!! What a load of old BS! Don’t like the fact that our banks are so messy and un-transparent when it comes to mortgages and loans and other such details of our financial world! Lets sort them out for once and for all asap!

G L Williams says:
2 August 2016

Which? August 2016 Better Banking – Update. “people borrowing £100 using an unarranged overdraft can face charges four times higher than if they used a payday loan company.”
In normal circumstances ‘borrowing’ without authority is known as theft. Surely British banks should not honour any payments with insufficient funds or sanctioned borrowing facilities. Payday loans are agreed
borrowings and therefore comparing their charges with those of unarranged overdrafts is a nonsense.

Which? seem to think it is quite acceptable for people to expect to take more money from their bank than they have, without asking for the bank’s agreement. The simple answers are to keep track of your finances – your responsibility – and if you temporarily want more money than you possess then ask for your bank’s agreement. If they don’t agree they might have very good reasons – such as you are not a good risk. This was a nonsense headline and sends the wrong message, particularly to those who do act responsibly (i.e. most of us).

GL Williams: When you say “In normal circumstances ‘borrowing’ without authority is known as theft.” you’re forgetting that no theft is involved. The bank willingly and openly offers their client that money. So it clearly isn’t theft. Now if may be imprudent behaviour and I suppose if you’re not holding down three jobs, attempting to pay rent, insurance and rates and feed yourself then the world possibly seems pretty good. But for those in the situation where they’re working as hard as they can to make a living, but who are being paid in irregular ways and times, then charging the same for an overdraft that they willingly advance you as a payday loans company comes closer to the definition of theft for me.

The banks are the major players in the running of the establishment.
Everyone has their price, and as such politicians in their path to self enrichment will do little to rock the boat where those of us lower down the scale would be able to benefit from moral decency instead of being downtrodden with these abhorrent below the belt charges.

My understanding of money is this .if you want credit you must pay for it .so only spend what you have in your pocket and save for things you want .or am i just older and wiser.

My son often goes over his arranged overdraft but usually not by much and almost always buying food for his family. He gets charged astounding amounts for going so little over. It’s over £100 no matter how little he goes over. Then the following month he goes over again as he is more than £100 short and needs food. Thus the spiral continues.

We have an account with NatWest and rarely overdraw. These figures you will probably think not worth worrying about but we think that the proportionality is out of kilter. We just received our annual statement.
Annual Average debit £6.80 – Average credit £952.30 – Arranged borrowing limit £1800 – Overdraft interest £1.25 – Overdraft Usage fee £24.00. Overdraft interest rate 18.28% – credit interest 0%.
Doe this seem reasonable?

That seems quite reasonable to me Dave. I can understand your concern at the ‘usage fee’ in relation to your average overdrawing but it costs the bank a certain amount to manage a customer’s overdraft whatever the amount involved. The arranged overdraft charge of £2 a month is the price you pay for that service allowing you to borrow at any time without further approval up to a total of £1,800. You did not borrow much over the year so your interest charge was very low. Your information shows just how economical it is to have an arranged overdrawing facility instead of running into the red without approval.

Your high average credit level has avoided the need for you to overdraw more perhaps but because current accounts generally pay no interest it does not directly offset the cost of your borrowing.

Diane says:
26 May 2018

Discriminatory treatment against…
Discriminatory treatment against transgendered person
This bank treats and continues to unfairly treat a woman who has undergone male to female transition contrary to the Equality Act 2010. They also treat a woman who is disabled under the Equality Act 2010 unfairly. Many staff do not care, but there are some who do, but this is a minority in my recent experiences. Taking legal advice is necessary because this company acts contrary to the law and legislation and take advantage of a person who has changed her name legally under the Gender Recognition Act 2004 and had operations and still in recovery. Leicester office is mainly incompetent in dealing with complaints fairly! However, Birmingham complaints office is useless.

This is a genuine factual account that should not be removed. It is factual. I have a major complaint with the bank that is under investigation. This is my personal factual experience with the bank after 31 years as a loyal customer who has been unfairly treated contrary to the EA 2010 a number of times.

This is how the bank have left me feeling after not one unfair treatment, but a number of unfair treatments regarding gender and disability within the last 12 months.

There is nothing whatsoever defamatory in this factual statement.
I have complied with Trust Pilot and amended my factual statement of truth and belief, but feel this is diluting the scope and purpose of what a review is about.

Further unfair treatment has continued since this forced amendment from trust pilot with the bank. I have major concerns with the bank and now made another complaint as the bank had refused to let me know how to make a Subject Access Request under Data Protection Act 1998 for all of my data. The bank are currently 23th May 2018 trying to frustrate my request for all of my data and even exceed the 40 day rule for complying with the DPA 1998. Yes, I have my proof of this too.

The complaints team and bank still refusing to treat me fairly and are now victimizing me contrary to the Equality Act 2010.

Since this review Leicester have partially apologised and acknowledged wrong doing regarding a further complaint, but other complaints remain outstanding and I await my data from the bank.

I am a reasonable person, on that “Clapham Omnibus”, but have a right to complain and be treated fairly not gagged by the bank in doing so. This is contrary to the law after making complaints of discrimination. This is known as victimization contrary to s27 EA 2010 Detriment suffered and my health, infections after corrective urological surgery is also suffering most likely as a consequence of being treated unfairly. For example, being called “He” many times, during calls, when staff are aware of my circumstances, the staff being hostile towards me and being less than professional in dealing with me, to name but a few of my experiences with the bank. The list is far too long to add to this list, but hopefully can be resolved with the bank as a reasonable person. How many other people have been singled out and had their comments removed as non transgendered customers? This is discrimination and victimization singling me out where other customers have made worse comments about their experiences with the bank and not had their reviews removed.

Further more, the bank are acting contrary to Human Rights Acts 1998 Articles 9, 10 and 14. This is a also a state interference by the bank to remove my legitimate and proportionate and fair comments of my experiences with the bank and now harassing me which is a hate crime in the UK against a person who is Transgendered woman by removing my comments from Trust Pilot.

I am reasonable to amend and even remove this review when the bank treats me fairly and resolves the outstanding matters. I await the bank’s response regarding the matter.

Yours faithfully,

Disatisfied customer.”