Unarranged overdraft fees can cost bank customers up to seven and a half times more than borrowing from a payday loan company, new research shows. But there are steps you can take to avoid these sky-high charges.

Someone borrowing 100 for 30 days faces a maximum charge of 24 via a payday loan compared with a whopping 180 from an unarranged bank overdraft, according to research published by consumer body Which?.

This is because banks charge their fees over billing periods, as opposed to simply basing it on the amount of days the sum is borrowed. As a result, an account holder may only have the debt for 30 days, but these days may fall over separate billing periods so customers essentially face the charges twice.

In contrast, the maximum charge that would be applied to a payday loan debt over this period would be 24, due to caps on maximum repayment charges introduced by the Financial Conduct Authority in 2015.

Vickie Sheriff, Which? director of campaigns, says: "It's not right that people with a financial shortfall can be charged so much more by the big high street banks than they would by a payday loan company especially if the money is borrowed over two monthly charging periods. If banks can continue to set their own charges, then consumers will continue to be hit by exorbitant fees.

"The Financial Conduct Authority must use its current review to cap these high charges and ensure consumers cannot be charged more for unarranged overdrafts than arranged overdrafts."

Martin Lewis
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What is an unarranged overdraft?

An unarranged overdraft refers to any overdraft facility you use that hasn't previously been agreed with your bank. This is created when your account becomes overdrawn or any arranged overdraft limit is exceeded. For example, if a bill comes out of your account, but you don't have enough money to pay for it in your account or in your pre-arranged overdraft, the bank may cover the charges for this. But you'll be in their debt and will be charged a fee.

How do you avoid them?

Recent research from the Competition and Markets Authority found that over half of overdraft users (51%) end up dipping into unarranged overdrafts at some point. However, there are a few things you can use to possibly avoid being hit by potentially extortionate fees.

  1. Contact your bank. If you think you may have to dip into your unarranged overdraft then get in contact with your bank in advance. NatWest and Santander request that customers in financial difficulties do this, but with any bank, they may be able to help you organise your finances once you get in touch.
  2. Sign up for money management tools. When responding to the report, Barclays, Halifax, Lloyds, NatWest and Santander said that they have tools such as text message alerts to help customers keep track of their money so that they know in advance when they are close to dipping into unarranged overdrafts. Signing up to these should reduce the chances of you accidentally picking up such charges, and if you do will make sure you know to clear the unarranged overdraft as soon as possible.
  3. Switch your account. While you shouldn't really be living in your overdraft, if you are, you may wish to switch to a bank account with lower fees and charges. Many people think that this isn't an option, particularly if they're in the red, but it is possible to transfer your overdraft facility from one banking provider to another. If you decide to do this, make sure you compare the overdraft fees charged by any bank you may be considering.
  4. Is a credit card cheaper? Using credit cards can be cheaper ONLY if you pay off any money you have borrowed within their interest-free period. Doing this is a complicated process, but you can find out more by reading our Money Transfers guide.

For more information on overdraft charges check out our Bank Charges Comparison tool.

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