UK Overdraft Facility Providers Start Charging Revised Rates
03 Mar 2020
Approx Reading time: 4 minutes
- While some financial service providers have increased rates, others have made overdraft borrowing cheaper for their customers.
- Many customers will now consider cheaper alternatives as it has become easier to compare overdraft fees being charged by various financial service providers.
- Experts have also advised customers to consider other borrowing options such as credit cards, as they may be cheaper than an overdraft facility in some cases.
It’s March, which means that many overdraft users in the UK would now begin to experience a hike in charges paid to their financial service providers for using overdraft facilities. In some cases, this hike would be more than double the fees consumers were previously paying on their outstanding overdraft balances.
The increase comes as a result of a change in policy
by the Financial Conduct Authority (FCA) in the UK whereby banks and other financial institutions have been banned from charging fixed fees on their overdraft facilities. The change in rules also demanded that fees charged on unarranged overdrafts should not exceed that charged on arranged overdrafts.
Consumers using arranged overdrafts are expected to benefit from this change, primarily because they are likely to pay less for using the facility. However, for many, borrowing through an overdraft has become more expensive.
According to experts, even with arranged overdrafts, many customers would find their borrowing costs doubled in the coming weeks due to changes as mandated by the FCA. However, some banks including Barclays, Halifax, and Santander, to name a few, will revise rates and policies in a manner that may end up creating savings for their customers.
A recent announcement
made by Metro Bank in the country highlighted that consumers should expect to be charged £6.40 higher on using an overdraft facility (on the borrowing of £500 over a period of 30 days as an arranged overdraft), an increase in its 15% rate to 34%.
However, revised rates that have been announced by other firms don’t seem to have increased as much, with Monzo charging 19% after replacing its £0.50/day charges which are expected to save consumers an approximately £7.80 (on the borrowing of £500 over a period of 30 days as an arranged overdraft). Starling Bank is maintaining its 15% rate, and Virgin Money expects to create savings of £3.34 for its customers (on the borrowing of £500 over a period of 30 days as an arranged overdraft).
Hence, the change in rules as demanded by the FCA has created the opportunity for cheaper overdraft facilities as well, although the charges customers will actually pay depend on the provider as well as the customer’s current account.
Since usage fees have now been banned by the regulatory authority, it has become easier for customers to make a comparison of costs being charged by various overdraft facility providers and select the one that is most suitable to their needs and also cost-effective. Hence, it is expected that there would be an increase in the number of customers that would switch from their overdraft facility provider to a cheaper alternative option.
However, according to experts, for many overdraft facility users, other borrowing options might now be cheaper, such as credit cards. The lowest purchase rate borrowers can now expect to pay on a credit card currently stands at an APR of 9.9%, while store cards may charge as much as 29.9% APR and the APR charged on average by credit cards available in the market is around 24.8%. Also, credit cards have additional borrower protections on them, thanks to the Consumer Credit Act Section 75, making them an excellent borrowing option for many consumers.
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