/ Money

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‚Äô 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‚Äôve 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‚Äôt 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

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Douglas says:
11 July 2016

Geoff Hawkesford above says “No doubt it‚Äôs written in very small print somewhere….”. In the last three months I have received a large number of voluminous notifications from my bank in very small print informing me of changes to terms and conditions. It is really unacceptable. Why can’t they make up their minds once and for all what the terms and conditions are lay them down in reasonably sized print?

Alan Bond says:
12 July 2016

Some years ago the OFT declared these charges to be unfair and that was on the basis of case law dating back to the early part of the twentieth century, yet still, our (un)elected represetatives have done NOTHING to rein in these sharks. The simple answer would be to bring back Giro bank on a not-for-profit basis and give ’em some real competition.

Any person who fails to keep a proper check on their finances is foolish if they are on a tight budget they should be more carefiul on what they spend, they should contact there Bank and have an authorsied agreed arragement to cover themselves in case of a shortfall. They should be aware of the charges as well as there balance at all times. In my view it is simple either on a computer of a note book to show the balance & spend. Which should advise people to do this.

Sadly, we all make mistakes from time to time and, as others have said, sometimes the overdraft is caused by mistakes not of the customers doing. The question is whether the banks have the right to punish customers who accidently go overdrawn or exceed their limit. Punishment is for criminals yet these charges for unauthorised overdrafts are punitive. They charge high fees for things that are computer generated at minimal cost. So clearly it is fair that a slightly higher interest rate be charged, but the fees for any item should reflect the actual costs to the bank.

Yes, some are profligate and/or improvident but remember it is the banks that are choosing to lend them money. They never turn off the money tap until it is for too late and people have become accustomed to excessive spending.

It is not right that those on the lowest incomes should be funding free banking for the rest of us.

Bob says:
11 July 2016

In over fifty years, I have only once been overdrawn, and that was when, in the armed services, I was paid into a bank account I hadn’t asked to be paid into. That was strange, and no explanation was forthcoming. I know an overdraft would be costly, so I keep an eye on my expenditure.

Perhaps the fees are excessive, but they are avoidable. Banking is not some sort of social service or charity, run by managers like the one portrayed by Jimmy Stewart in “It’s a Wonderful Life” They’re much more like the one portrayed by Lionel Barrymore as Mr Potter.

It’s not always avoidable – my council decided (incorrectly) that we’d been overpaid council tax benefit, they debited the amount they wanted back immediately, sending us overdrawn. It took me weeks to get the money back from them and a refund for my bank charges and compensation. I cancelled my direct debit for them and they now get paid late every month to teach them a lesson!

Don says:
12 July 2016

I agree with Bob, in this day and age with online banking and smartphones it should be easy to keep an eye on your balance and act accordingly. Having said that the charges are excessive and a cap should be put on the amount a bank can charge and should not be punitive.

Don, The CMA are proposing a compulsory cap and the banks I am with already do cap.

Always avoid using the direct debit system for regular fixed amounts and fix a standing order with your bankers, which has the wonderful advantage of being totally controllable by you and not them!
Any organisation that knows your bank details could empty your account on a whim!

The banking system takes responsibility for direct debits – for the organisations they allow to use the service and guaranteeing to refund customers if the service is misused. I agree about standing orders for fixed regular amounts, but where the amount may vary, and a direct debit needs to be used, the issuer must inform you in advance before they make any change to your payment. Both have their place. But your account will not be emptied, I am assured, and left that way (unless you overspend of course ūüôā )

All the bank should do the right thing and pay the money back too all their customers with an apoligy and making sure it does not happen again and we hould be paid back with interst and this includes the plastic cards as well , this should be done right way with out fail and any dealys .

(Edited by moderators: We have edited your comment as it was all written in capital letters. Please read our commenting guidelines for more information).

There is a simple way to avoid overdrafts and it is within everyone’s grasp, do not overdraw. Personal Debt in this country is an average ¬£10.000 per person, I have no debts, yes I am working class, born and raised in the North East of England which taught me a great lesson about them and us, I have friends who have ridiculous debts “Oh get it now we will worry about how we are going to pay it of tomorrow” they have everything you could wish for however they do not go anywhere, no holidays, never at the pub, no sports and no social life.

Richard Farrow says:
11 July 2016

It is not within everyone’s grasp to not go overdrawn. Some peoples circumstances are different from yours. I have never earned enough to keep much money in the bank so when an unexpected payment is taken from your account you may go overdrawn. I have had direct debits taken from my account after they had been cancelled. I have had four direct debits from one business taken all at the same time without warning. Some people’s wages are occasionally delayed so that there is insufficient to cover the direct debits. People on benefits can have payments stopped at a moments notice. I was self-employed for many years and rarely knew how much money would be coming in each week which makes it difficult to budget, especially if you don’t get paid when expected. So for people on low incomes or benefits or zero hours contracts, no matter how well they budget they can still get caught out.

Many people could deal with this by arranging an overdraft facility with their bank, at a sensible interest rate.

I have a current account with Santander and my salary was late being paid into it. Then direct debits were being paid from the first of the month, taking me into the red. I incurred charges due to no fault of myself and was able to recoup these from my employer. However, I now have an authorised overdraft (which is never need to use but is a “safety buffer” just in case) and have moved all direct debits to be paid on the 15th of each month by which time my salary should have always been paid in. I have never used the overdraft in over a decade but it is comforting to know it is available.

I get charged £1 per day overdraft fee from Santander whether you use this facility or not

I was around £1.11 pence short of payment re a direct debit with Santander who refused to payment & charged me for same

I have to say I find this a surprising post as it implies an annual charge of £365 for a facility unused or not.

So I looked at Santander at it is true. I am astonished anyone banks with them at all.

Logically one should apply for a small loan and build yourself a £500 float and then take a Basic current Account with Santander. But apparently few banks like to offer them.

Before we get too carried away with banks as leeches remeber we are the people who want whizzy bang Internet accounts and ATM’s etc and the Banks are please to do this if it means they can recoup the cost by closing Branches and automating all their services. However buying new computers and integrating systems does cost an awful lot of money.

We have been spoiled by a long period of banking when the interest on everyones current accounts actually let Banks run these accounts free of charge. Which? can take a lot of credit for making banks pay interest on people’s current accounts which removed that profit from them. One of those foreseeable consequences that were glossed over in the populist cry that Banks were not paying interest on deposits.

So everyone can now pay for the Banks services. However switching may be better for some people’s circumstances:

Michael says:
15 July 2016

I have a Santander account with an overdraft facility. They only charge you £1 per day whilst you are overdrawn, never when you have a positive balance.

This just proves the greed of the banks once again, it is exactly as before when the banks got completely out of control charging unreasonable amounts for minor unauthorised overdrafts and to those who are holier than thou and telling everyone to look after their finances better and who never go overdrawn think themselves lucky to have plenty of money that they will never be in such a position , but many are living day to day financially and all it takes is a minor error to be fined are you saying this is proportionate to the offence ! is 11p overdrawn is justified by a ¬£15.00 fine instead of supporting the banks on this matter you should be considering a common sense approach after all who bailed these greedy banks out these are the very same banks that were part of a system that brought the global financial world to it’s knees . It seem these greedy banks will never learn , the law will have to change to restrict this type of despicable behaviour .

Put in those terms it looks unreasonable and grossly disproportionate, but in most cases the bank would not charge for an 11p unarranged overdraft on a first occasion and if a credit balance was quickly restored. But we need to pause for a moment and consider whether we want to propel the banks onto a course of closing accounts, returning direct debits, and pursuing defaulters as debtors. As Suze says on the previous page, “ Going overdrawn without prior arrangement tips someone‚Äôs account into requiring quick decisions by a bank as to whether it is fraud, a one-off mistake, or an ongoing problem. It might require items to be returned, which unless things have improved, means often lengthy phone calls and paperwork.“. Banks have costs when an account goes out of control, whether it’s by 11p, ¬£11, or ¬£110.

I don’t expect the truth to be popular but high street retail banking did not bring the global financial world to its knees. On the contrary, international corporate money-trading, reckless lending, and criminal misconduct nearly ruined retail banking which is the lifeblood of the economy and provides a flexible service to millions including essential credit in various forms.

Why not have an arranged overdraft to cover these slips? You then avoid the unarranged overdraft charges. As for 11p, the bank I am with give an automatic buffer of up to £15 before any charges are made.

Which? could present all the major banks charges for arranged and unarranged overdrafts, plus buffers. Isn’t it more important to help consumers make a choice, rather than presenting the worst cases to grab a headline.

So far as I can make out the crash was caused by the inevitable collapse of sub-prime mortgages in the US. These were taken out by people who couldn’t afford them under the influence of disreputable salesmen, thus causing an artificial rise in property demand and hence values. Those salesmen wrote lies on the application forms to get them approved. Others connived at this. Yet it appears that no one involved in this fraudulent activity, very close indeed to real people and high street banking, was ever prosecuted.

Peter, people forget that one of the instigators of the financial crisis was overborrowing – particularly we individuals buying properties at ever-inflated prices in the belief they would stay that way. Taking mortgages based on self-declared incomes, taking loans at much higher multiples of earnings than was sensible, taking interest-only mortgages that give you no equity. Using credit cards (borrowing money) as if there was no tomorrow. Well, there nearly wasn’t.

So we buyers and borrowers have to take some responsibility for behaving as we did, the government for allowing it (but in fairness they would have been criticised if they had not, as standing in the way of economic growth) and the banks for supporting it.

We cannot blame just one sector as if we were mere bystanders. We were complicit in what happened.

Peter says:
11 July 2016

Two years ago my daughter took out a car loan with Santander which I had to sign for,12 months later I looked at the paperwork, and decided that the interest was rather high, so got two balance transfer cards over a period 12 months shorter than loan and saved 1200 pounds.
proving that it is always worth looking at all options for loans/overdrafts as banks will always try to take advantage of customers who only need a little help in the fist place.

Banks should not make fix charges. All bank charges should be made by way of an interest charge. This interest charge could be made at the end of the month. As an interest charge, Banks would have to quote the rate of interest that they charge. Say for example, the customer went overdrawn for one day with or without authority and was charged say £10.00 for that oversight, then the interest rate for that one day would be an eye watering percentage. It would make Pay Day Loans look extremely cheap and might embarrass banks to bring their charges down to a reasonable and sensible level.

Fixed charges apply, for example, to “unpaid” transactions where both the bank and the recipient are involve in work in dealing with the failed transaction. A fixed charge seems appropriate; whether the size of the charge is is something for debate.

Although I DO NOT AGREE with what the Banks are charging I do not agree with Credit Cards nor do I agree with the practices some banks employ to rake money in. It is time the government of the day fix bank bonuses at the same level of interest paid to savers because it is savers who give their cash to banks, not for dozy bank managers/directors to award themselves huge bonuses. Most of which have been paid to abject failures in the past decade. Just what will the Tax Payer all of whom bailed out the banks when they went bust a few years ago and what interest did the government add to the total loan nothing the public lost out yet again.

John says:
11 July 2016

Nat West are quite good with a credit zone fee of £6 per month plus a reasonable amount of interest for a short term overdraught if this pre arranged credit zone is used. It used to be better,with 3 months credit zone for £6 as far as I remember. However,since then the bank was bankrupted by the CEO and is now owned by the tax payer! Of Course,the CEO was never prosecuted and got a nice little Gold Plated Pension ,even though he was responsible for gambling and losing the banks money!

Del says:
11 July 2016

I accidentally transferred cash from my current account to my sayings account, rather than the other way round. I have yet to find out what I’ll be charged. Unreasonable, as overall, I wasn’t overdrawn

Barclays used to offer linked savings and current accounts designed to transfer money both ways to keep only ¬£500 in the current account. Paying for transactions exceeding this simply resulted in an automatic transfer. The usefulness then was interest rates on savings were worthwhile and you didn’t have to bother with making regular transfers manually. Do any banks currently offer this?

You can bet the extra interest on your savings account will not offset the charges for overdrawing on your current account. It’s not difficult to make that mistake when doing internet banking, although my bank always checks that you are moving the money between the right places and requires you to confirm. It does mean you have to concentrate and cannot let your attention wander.

About 35 years ago, when I was working with British Aerospace, I had changed to the Co-operative bank. One month a cheque I was paying bounced by less than 50p. I was written an unpleasant letter charging me £2.50 for the bounced cheque and £2.50 for the letter. Needless to say this debit was swiftly subtracted from the a/c causing it to be overdrawn.

Agree 100% had bad PPI treatment from Nationwide,And a lot of bank charges badly let down by them so changed to Santander a lot better now.But all banks could do a lot better than they do now.

neil swales says:
11 July 2016

These money grabbing swine not only give themselves massive bonuses even when they gamble away their clients money and WE the public have to bail them out. We should have followed Icelands approach and seized all their money, collateral and then sent the b******s prison! If more countries followed their example I’m 100% certain that they would think twice before conning the general public.

Jenny Cartwright says:
11 July 2016

Only yesterday I was charged a ¬£12.00 penalty for being 2 days late paying off my Visa card with only ¬£70.00 outstanding, I think this is a bit steep. I have never been late before paying off my card in full each month and was quite shocked to find the ¬£12 added on. This was because I had trouble with my computer for a couple of days and couldn’t get on line to do the transfer

Jenny, this is a standard charge to deter late payment. I had this problem, like you, as a one off. I contacted the card provider, nicely pointed out the reason I was slightly late, and the charge was removed. I suggest you try the same. There are human beings at the end of some phone lines. Good luck.

The same thing happened to me Jenny during the last severe winter when snow disrupted all means of transport and postal systems my cheque got held up and arrived late and I was charged the same amount of ¬£12. I questioned this explaining the cheque was posted in good time prior to the deadline and that this was for me a first. The gentleman I spoke to on the ‘phone was polite and very understanding and I, like Malcolm had the charge removed.

Banks are businesses not charities and if people persist in the illusory belief they can spend money they don’t have without penalty then they are not living in the real world.

The real victims here are the people whose savings are not being recompensed with a proportionate return, due to the current low interest rates, some even resorting to dodgy deals, succumbing to shark investors who take off with their pension pots never to be seen again.

With present economic uncertainty prevailing and the likelihood of interest rate increases looming maybe it’s time for people to reassess their financial circumstances by preparing for and making allowances for the real tough times that probably lie ahead.

Ten or fifteen years ago I received a credit card bill with interest. I had not received the previous one by post and my money management was obviously not good enough to look out for missing bills. I explained this to the company and they waived the interest.

I asked if I could pay my bill by direct debit in future but was told that this was not possible. Years later I overlooked a credit card bill due to illness. I paid the interest and contacted the company saying that unless I could pay by direct debit I would close the account. This time I was told it was possible and I now pay my credit cards off by direct debit, so just have to watch the balance of my current account. I check my bank account online every couple of weeks.

Halifax charges fee of £1 a day for ARRANGED overdraft on it basic current account from amounts overdrawn of £0.01 to £1,999. And this is already considerably more than payday loan interest. It is £5 a day for unarranged overdrafts

That’s 18% a year on the ¬£1999 – about 1/60th of a payday loan. Other banks give a ¬£15 free overdraft. Others just charge 18-19%. On unarranged overdrafts some charge from 75p a day depending on the amount. You do need to look at your requirements and choose and appropriate account or bank.

I hesitate from contributing to this particular topic as my late son, who died of leukaemia aged 45, 12 years ago was a branch manager at one of the main high street banks. Needless to say I have some knowledge of the other side of banking and of the financial irresponsibility and the predicament some people get themselves into, also the means they will go to to persuade banks to relieve them of the debt they have incurred through their reckless spending. His advice to me was always to keep a contingency in your current account in the event of the unexpected and unforeseen, which is almost bound to happen at some time, as the above comments demonstrate. Anyone who thinks otherwise is not living in the real world.

I personally am not in favour of joint accounts no matter how close a couple may be, as they can cause much marital disharmony and in extreme cases, divorce. People with more than one job and living in shared accommodation are more at risk if they have little grasp of each other’s spending habits before embarking on multiple occupancy. First and foremost a banker should be decided upon with the integrity to manage all basic essential expenditure, with all parties agreeing on who is the most suitable person to take this on and is capable of putting a little aside for a rainy day.

We have experienced in the last 7/8 years the effects of irresponsible lending by banks which almost completely toppled the global economy, causing the austerity we are now coming out of. Question is, have the banks learned any lessons from the mess they got us into? Surely it’s in everybody’s interest for them to establish a customers ability to pay back any loans to protect their own interests which ultimately are capable of affecting the state of the country’s economy as a whole. It’s up to everyone who has a bank account to take responsibility for their own spending habits and to make allowances for the unexpected, not if, but when it occurs.

For the record, bank managers themselves are not permitted to go overdrawn on their own accounts, so why should anyone else? If you are prepared to take the risk then be prepared to suffer the consequences.

This really is totally missing the point. Our petition is to defend the people who accidentally go overdrawn by a few pounds by accident, who are then charged extortionate fees by comparison by the banks. Do you think it’s fair to charge someone say¬£15 because they were overdrawn by ¬£6.00 for a few days?

Thats not fair banking it’s plain and simple greed, or legitimate robbery. We do not wish to defend the foolish or spendthrift, the banks will soon catch up with them, but we must defend people on low salaries who by accident dip into an overdraft, for a few days or weeks. Charge them a fee, yes but do not bleed them dry, or put them in a continual spriral of debt, due to exhorbitant charges!

The point being missed is that many of these people should protect the overdrawn possibility by asking their bank for an arranged overdraft. They are not expensive.

If they don’t ask, is it because they know they are a bad risk? Or have they insufficient history with the bank for their risk to be assessed?

My banks do not charge on the first £15 of an unarranged overdraft. But they may well decide to allow a payment, for example to your car insurer when otherwise, if they refused payment, you might end up without insurance cover.

I was charged £25 by the coop bank , due to an oversight on my part, for having insufficient funds in my account to pay a direct debit. This was the first time that I have ever been overdrawn with this bank. Also, I had sufficient funds in my accompanying deposit account to cover it. Why did they not let me know and I would have rectified it?
I did write a letter of complaint but the person who replied said it was the law and that they were entitled to do it. I was most unimpressed by the tone of the letter i.e. tough luck..you lost!

You can ask some banks – don’t know about the Coop – for a text warning as soon as you go overdrawn. The CMA propose this should be compulsory, together with a grace period to let you put funds into your account.