As of the 6th April 2020, new changes have come into effect that were proposed by the Financial Conduct Authority (FCA). The idea being that overdraft users can only be charged a simple annual interest rate without any additional fees or charges on top. This would mean 7 out of 10 overdraft users may be better off or see no change in costs to them. In January 2020, the FCA reported 14 million people used unarranged overdrafts every year, heralding support to the many people this affects. Now that the new changes have begun, how do they affect back account holders and what have the Banks done to adjust to them?
An overdraft allows bank account holders to borrow money through the account itself, by letting them take out more money than there is in the account. This overdraft facility acts as a type of loan and is typically used for short-term borrowing or emergencies only. Where some people use their overdraft facility as intended and clear the balance each month, in December 2017 it was reported that almost 2.1 million bank account holders in the UK were stuck in their overdraft facilities and went into the overdraft every month. The average amount owed was approximately £1722.
Debt charity Step Change had conducted the research and found 81% of people used overdrafts to pay for food, living costs and household bills. The report, titled ‘Stuck in the Red’, called for the FCA to investigate unaffordable overdraft lending and for the banks to do more to help customers, including removing unarranged overdraft charges. The FCA back in July 2017 reported their review of high-cost short-term credit, and found 760,000 borrowers in this market saved a total of £150 million per year by using payday lending or short term loans since FCA regulation came in, delivering “substantial benefits to consumers”. However, unarranged overdraft fees on bank accounts were highlighted as a particular concern as often being high and hard for consumers to understand. Almost 3 years later, and the new changes have now come into place.
Unauthorised vs Authorised Overdrafts
Authorised or ‘arranged’ overdrafts are agreed with your bank in advance, however, unauthorised/’unarranged’ overdrafts, occur when a bank account holder spends more than what is in their bank account without planning this with the bank first.
The FCA highlighted unarranged overdraft fees as being particular high. In fact, the FCA determined that unarranged overdraft prices were regularly 10 times – and for some up to 20 times – as high as for payday loans. If someone does not have an overdraft facility agreed and goes overdrawn, the bank could charge a higher rate of interest, for example, if £100 is overdrawn and unauthorised, approximately £5 per day could be charged when compared to an arranged overdraft.
With the new rules, firms must charge a simple annual interest rate, without additional fees and charges for an unarranged overdraft. This amount reduces the cost of borrowing through an unarranged overdraft to under 10p a day, saving the unauthorised overdraft user as much as £55.35 per month if they were £100 overdrawn for 7 days. It is estimated that 19 million UK bank account holders use an authorised overdraft facility, whilst 14 million use unauthorised overdrafts. The fees generated by lenders from overdrafts equated to £2.4 billion in 2017, meaning with the new changes this is expected to drop considerably. However, to counter the new rulings, many banks have adjusted how they charge for overdrafts.
The Banks’ Overdraft Changes
Whilst many overdraft users welcomed the ruling changes to overdraft fees, changing to a simple annual interest rate has seen some banks increase rates. At the end of January 2020, the FCA wrote to all banks asking for an explanation to the new overdraft pricing and measures they have made, with it reported banks such as Santander, Lloyds and HSBC were setting a 39.9% annual interest rate for overdrafts. The letter reminded the banks that the new ruling was designed to help support those customers who are worse off and particularly vulnerable.
For consumers, the changes present an opportunity to clearly see how much interest you will be charged on an overdraft, meaning it is a good time to shop around and look at options. The biggest impact will be on those customers who have an authorised overdraft, as it sees the interest rates increase and in some places their charges doubling. For example, if you borrow £100 on an overdraft, you can expect to pay nearly £40 in interest. The Money Advice Service has a handy comparison tool where you can compare bank account fees and charges to see how this works for you. Many banks have contacted their customers already in the last few months explaining the changes to the interest rates.
What to Do If You Are Affected by The Changes
There will be some overdraft users who will feel the effects of the new ruling more than others. If you only occasionally use your overdraft, not having to pay for daily or monthly fixed fees when going overdrawn could save money overall, especially if it was an unagreed/unauthorised overdraft. Those with an agreed/authorised overdraft limit who regularly go overdrawn, or who live within the limit month to month, may see the amount they pay back in interest increase, as the annual overdraft interest rate changes. For example, Nationwide charged 18.9% on their Flexaccount overdraft previously but are now looking to charge 39.9%. HSBC Advance account holders will see an increase from 17.9% to 39.9% and M&S Bank account holders will go from 15.9% to 39.9%. In some instances, customers with an overdraft may look at alternatives such as loans and credit cards where interest rates may be lower.In light of the coronavirus pandemic gripping the world since the changes were announced, some banks are in fact freezing rates at lower levels temporarily until at least the end of April. This includes HSBC, who were set to bring in a 39.9% annual interest rate but are now decreasing back to 19.9% due to recent events.
With as many as 29% of 25-34 years olds living in their overdrafts according to FCA research, many UK adults will consider the alternatives available to them now that some banks have increased their annual interest rate. The best way to tackle reducing an overdraft is by regularly paying off what you can, unless you can clear it in one payment. As per the Money Advice Service, using savings where you can and looking at your budgeting options may help to reduce your outgoings so that if you have a large overdraft amount, you can reduce it quicker.
At Wizzcash, we offer instalment loans up to a maximum of 3 months charging a maximum of 0.8% interest per day, per £100 borrowed and are available between £200 to £1000. For more information, please get in touch.