Changes in overdraft fees and overdraft interest rates are hitting the UK in April 2020. We’ve got the scoop on what these new rules mean and how they could affect you.
On 6th April 2020, new regulations will come into place with the intention of clamping down on the overcomplicated laws surrounding overdrafts.
You’ve also probably seen that the banks have been announcing some big changes in overdraft interest rates.
So the question is - what’s happening, and who is it going to impact?
What are the new rules for overdraft charges?
There are three main things that will be different under the new overdraft regulations:
- Interest on all overdrafts will be charged at a single annual interest rate (APR).
- Arranged and unarranged overdrafts will be charged at the same interest rate as each other.
- Banks will no longer be able to charge any additional fees for using an overdraft.
In short, this means the costs of using an overdraft will be much more straightforward.
The FCA claim that 7 out of 10 overdraft users should be better off from these new rules.
Rather than having to factor in any daily or monthly fees, plus varying interest rates depending on how long you’ve been in the overdraft for and how much by, now you’ll just be charged at one flat rate.
That means you can understand the cost of using your overdraft at just a glance - by looking at the APR - and then compare this with other lenders.
Why are banks increasing their overdraft interest rates?
These changes in overdraft charges are great in theory. However, putting rules in place to stop banks charging any fees will cut into their operating costs for providing overdrafts.
To account for this, the majority of banks have announced that they’ll also be raising their overdraft interest rates, with some charging up to 49.9% APR.
The FCA have intended to take this into account and claim that 7 out of 10 overdraft users should be either better off from these new rules, or else see no change. In which case, who are the 3/10 that are missing out?
These new rules work out well if you don't regularly go into your overdraft, and on those rare occasions it's only by a little. But for anyone that is permanently in their overdraft, those larger interest rates could start having a big impact.
How these changes in overdraft charges work in practice
Previously, if you had an overdraft with Natwest and went overdrawn by £20 for one day, this would cost you £6.01. That’s made up of both a fee for using the overdraft (£6.00), plus one day’s interest (which only comes out to £0.01).
Under the new overdraft interest changes, there’s no longer any fees. So rather than paying over £6.00, now you’re only paying the interest.
That works out well if you don’t regularly go into your overdraft, and on those rare occasions it’s only by a little. But for anyone that is permanently in their overdraft, those larger interest rates could start having a big impact.
For someone permanently overdrawn by £2,000, the annual costs could triple from around £180 a year to £680 a year - an increase of nearly four times as much.
What to do if these overdraft changes are going to impact you
If you’re worried that you could be an ‘overdraft prisoner’, check out this guide from MoneySavingExpert for tips on how to get out of your overdraft.
Alternatively, if you’re really struggling to manage your debts, we’d recommend seeking advice from a non-profit debt counselling agency like Citizens Advice, National Debtline or StepChange. They’re there to provide impartial advice and help you find a solution to get things back on track.