Unarranged overdrafts cost up to 4x payday loan

Posted by Erika Bone in Banking on 18 July 2016 - Erika is a Credit Analyst at checkmyfile

An unarranged overdraft can cost you up to four times more than a payday loan, Which? has identified in its recent study conducted on unfair bank charges. The consumer watchdog has argued that these “punitive” unauthorised overdraft charges are opaque, indeterminable to calculate and causing harm to the most vulnerable of customers.

Payday loans are now infamous for extortionate interest rates, with one such lender having a representative APR of 1509%. But since January 2015 the FCA have restricted the interest rate a payday lender can impose and introduced a fee price cap of 0.8% per day of the amount borrowed. This means in real terms that if a customer borrowed £100 for 28 days the most that can be incurred in charges and fees is £22.40.

In direct contrast to this, there are no caps in the Current Account market, with the Competition and Markets Authority ruling that banks should be allowed to find their own level even though the Authority’s own statistics disclosed that the banks generated over £1.2bn through unauthorised overdrafts in 2014.

The level that banks have decided to impose varies significantly from bank to bank. If a similar customer borrowed £100 from an unauthorised overdraft for 28 days with NatWest or Royal Bank of Scotland the costs incurred would be £90, with Lloyds or HSBC they would be £80, Santander would charge £67 and Barclays would currently charge the least with £29.75. These costs could rise if interest payments and unpaid item fees were included. Whereas a payday lender can only charge 80p for 1 days borrowing of £100 the Lloyds Classic account charges £10.

Which? director of Policy and Campaigns, Alex Neil has called for the FCA to intervene and forcibly limit the amount banks can charge stating, “The regulator has shown its prepared to take tough action to stamp out unscrupulous practices in the payday loans market and must now tackle punitive unarranged overdraft charges that cause significant harm to some of the most vulnerable customers.”

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