A simples guide

A guide to overdrafts

Let’s start with ‘what is an overdraft?’ Most of us would probably say it’s what happens when you take more money out of your account than you actually have in there. That, by the way, is what the dictionary says too!


Banks look at it slightly differently, often referring to an overdraft as a borrowing facility. That’s because there’s an assumption on the banks part, that you have arranged the overdraft with them as a way of borrowing money for a short period.

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What is an overdraft

Overdrafts can be useful in the event of a short term shortfall in funds. For example, your car tyre may get a puncture and need replacing which you hadn’t budgeted for so you go into your overdraft to tide you over until pay day.

When it comes to what it will cost you to use your overdraft facility, there’s a big difference between being accidently overdrawn and having an arranged, authorised and planned overdraft in place (they are sometimes called different things!).

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What’s an authorised overdraft?

As the name suggests, an authorised overdraft is an overdraft that you have agreed with the bank in advance of you actually using it.

Some banks have overdraft facilities in place on their current accounts as a matter of course. More typically, you will need to arrange it with your bank.

The overdraft will come with a certain financial limit. There is usually no cost involved in putting the facility in place. There’s also no charge for it being there as long as you don’t use it.

 

Authorised overdraft fees

Most banks will charge you a fee and interest when you use the facility. These vary from bank to bank and account type to account type so it is worth checking with them in advance.

However, as a guide, here’s what some of the high street banks say:

Banks                          Fees                            Note

Barclays                     75p per day               Up to £1,000

Lloyds                         £6 per month             If used, charged once

TSB                             £6 per month             If used, charged once

You’ll also pay interest on the amount overdrawn, which can be at interest rates of close to 20% EAR (equivalent annual rate).

Due to the size of these fees it is only worth using the overdraft as short term funding. If you’re likely to be overdrawn for any length of time it might be worth looking at another form of debt.

If you’re a student, talk to your bank about which overdraft facility your account has. Many banks have special student accounts that may have different fee structures.

What if I go overdrawn without arranging it?

This is known as an unauthorised overdraft and it can get very expensive.

Unauthorised overdrafts come with different fees:

- Monthly fee – anything from £5 to £35 or more.

- Daily fee – can be £1 to £10 a day or more (usually up to a set limit per month).

- Transaction fees – can be £10 to £25 for every cash withdrawal, Direct Debit or standing order, cheque or card payment you make – whether or not your bank allows the payment.

If you find yourself in this situation it might be a good idea to call your bank as soon as you can and explain. You might be able to convince them to authorise an overdraft facility for you.

 

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Communicate with your bank

Rather than leaving it until it’s too late, talk to your bank if you think you’re going to need an overdraft. Be realistic about what you need and for how long. If it looks like your limit is going to be insufficient, call again and get your position authorised.

How long do they last?

Some overdraft facilities will remain in place until either you or the bank cancels it.

There’s an important point here though, your overdraft is at the banks discretion and isn’t guaranteed. That’s another reason why an overdraft is really only useful for very short term borrowing.