Lloyds, Halifax and Bank of Scotland to charge up to 49.9% interest on overdrafts from April

All three banks, part of the Lloyds Banking Group, currently operate a tiered system of daily overdraft charges, which came into effect at the start of last year. You pay different rates depending on the size of your overdraft – on most accounts, the fee is 1p for every full £6 you borrow up to £1,250, 1p for every further full £7 you borrow between £1,250 and £2,500 and then a further 1p for every full £8 you borrow over £2,500.

From 6 April 2020, this will change as follows:

• Daily fees will be scrapped and daily interest will be charged instead. Customers on most accounts will be charged a flat interest rate of 39.9% or 49.9% EAR on all overdraft borrowing. (Club Lloyds customers will instead be charged 27.5% or 49.9%, while overdrafts on student and graduate accounts will remain fee-free.) Interest will be calculated and applied daily – Lloyds Banking Group says this helps customers "take action sooner and avoid nasty surprises".

  Which rate you're charged will depend on existing information Lloyds Banking Group holds about your credit history and "how you operate your account", though it says the majority of customers will get the lower rate.

• Fee-free buffers are dropping to £50 on some accounts. Many accounts have a fee-free buffer, ie, a part of your overdraft you can dip into without being charged. On most such accounts this fee-free buffer will be cut to £50. For example, this will apply to the Ultimate Reward, Platinum, Club and Gold accounts across all three banks.

  The exceptions are student and graduate accounts, which will keep their existing buffers; Silver and Select accounts, where buffers are already £50; and the Lloyds and Bank of Scotland Premier accounts, where buffers are dropping from £500 to £250.

Today's news follows similar announcements from other major banks, as the industry overhauls overdraft charges to comply with new Financial Conduct Authority rules – though most others are setting overdraft interest rates at about 40%. See what's changing at Barclays, First Direct and M&S Bank, HSBC, Nationwide, NatWest and RBS, Santander and TSB.

How will these overdraft changes affect me?

Lloyds Banking Group says that once the changes come into effect, 90% of its customers with an overdraft will pay less – though its complex current fee structure makes it quite difficult to compare directly.

Here's a summary of how the changes are likely to affect what you pay for an arranged overdraft:

• If you're only ever overdrawn in your fee-free buffer, you'll likely pay MORE. This is because buffers are dropping on some accounts, which means you'll have to pay interest on amounts that were previously fee-free.

  For example, if you have a Halifax Ultimate Reward account and are overdrawn by £250 for seven days, you currently pay no extra fees or interest. But from April, only the first £50 will be fee-free and you'll have to pay interest on the remaining £200 (which works out at about £1.26 or £1.54, depending on the rate you get).

• If you currently pay fees on your overdraft, you'll likely pay LESS. This is because the amount you'll be charged in interest will probably work out to be less than the daily fees you paid previously, even if you end up with the higher 49.9% rate. For example, if you have a Lloyds Classic account and you're overdrawn by £500 for seven days, you currently pay £5.83. From April, you'd pay around £3.22 or £3.85, depending on the rate.

The changes outlined above only apply to arranged overdrafts. Lloyds, Halifax and Bank of Scotland removed all unarranged overdraft fees in 2017, and this won't change in April. 

How to cut your overdraft costs

If you're currently paying to use your overdraft, there are different ways you can cut the cost. Your options will generally depend on how big your overdraft is:

• Overdraft of up to £500? Consider switching to the First Direct current account*, which offers many a £250 interest-free overdraft, and currently also pays a £100 switching bribe. So if your overdraft's up to £350, it pays some off and the rest is interest-free.

  On any overdraft borrowing above this, up to a standard arranged overdraft limit of £500, you'll pay 39.9% interest (though this is after First Direct's changes come into effect – until Saturday 14 March you'll pay 15.9%). But even so, you'll still likely save by only paying interest on part of your overdraft.

    

• Overdraft of up to £1,500ish? The Nationwide FlexDirect* account offers a year's 0% overdraft, as long as you haven't had a FlexDirect account before – and if you get a friend with a Nationwide account to refer you before you switch, you'll both receive £100.

  There's no guaranteed overdraft limit though, as it'll be based off your credit score – so while it could be bigger than the £250 at 0% offered by First Direct, it could also be smaller than your current limit.

  And remember that the 0% rate will only last for 12 months, so you should see this as respite to sort out your finances. Once the year's up, you'll be charged 39.9% interest on the entire overdraft.

• Very large overdraft? If your overdraft is larger still, it's unlikely you'll be able to cover all of it by switching to an account with a 0% overdraft, but a few specialist credit cards offer '0% money transfers'.

  This is where, for a one-off fee of about 3-4% of the amount you're transferring, the card pays cash into your bank account. You can use this to clear your overdraft, so you owe the card instead at 0%. You can currently get up to 28 months at 0%. For a full rundown, see our Money Transfers guide.

For full help, see Martin's Overdraft Prisoners blog and see our How to cut your overdraft costs guide.

What does Lloyds Banking Group say?

A Lloyds Banking Group spokesperson said: "We are writing to our customers to explain the new overdraft rates that will apply from April 2020. As a result of these changes, 90% of customers with an overdraft will pay less than they do today. The majority of customers will pay the APR of 39.9% on most of our current accounts, 29.9% on our Club Lloyds account.

"Customers will be offered a personalised overdraft rate, up to 49.9%, depending on their circumstances. We have not charged unarranged overdraft fees or returned-item fees since 2017, and this will not change – we know this simple approach is valued by our customers."