In April of this year, the FCA introduced new regulations to the overdraft market, mainly in order to reform the way interest was charged and to help further protect vulnerable customers from potential financial difficulty arising from unfair or unjust overdraft charges.
While already regulated, overdraft lending hadn’t been reviewed in some time and so what may have been considered as appropriate a few years ago is not necessarily appropriate in line with today’s society. Amongst other calls for reform, one of the loudest was for unarranged overdrafts.
An overdraft is a facility usually attached to your current account which allows you to borrow money up to an agreed limit in order to manage your monthly cashflow. An overdraft and the overdraft limit is approved and agreed by the bank when a customer opens an account with them or applies for an overdraft, so that the bank can determine whether or not they want to grant access to this kind of borrowing. All lenders regulated by the FCA must conduct proper affordability and creditworthiness checks before approving a decision to lend to a customer.
However, just because someone does not have an agreed overdraft in place, it doesn’t mean they are unable to borrow money in the same way. This is an unarranged overdraft, sometimes known as an unauthorised overdraft. The bank has not authorised the customer to withdraw funds if their balance isn’t in credit, however because of the function of an unarranged overdraft, it remains possible.
This can cause huge problems for the customer as they may not realise they are in debt and they may not realise just how much it could cost them to use this unauthorised facility. Before the reform, people who were on low incomes or considered vulnerable were often worst hit with unarranged overdraft charges. As they could not access an authorised overdraft and were often excluded from other types of low interest credit, so sometimes they had no choice but to dip into their unarranged overdrafts.
Before April this year, it could cost up to twenty times as much to borrow £100 from an unauthorised overdraft than it did to borrow £100 from a payday lender.
While some were being charged unreasonable rates of interest, others with a good credit history and a strong grip on their finances often had an agreed overdraft with a 0% interest rate. So, while they were paying nothing to borrow money on a month by month basis, others were paying through the roof. In order to even out the playing field, the FCA introduced new rules to make the costs of overdrafts clearer and easier to compare.
One of the biggest changes to unarranged overdrafts since the new rules came out in April is just how much it now costs to borrow money. For example, before the reform, it could cost around £56 to borrow £100 for seven days at a typical high street bank. Now, it will cost as little as 65p. The changes mean 7 out of 10 consumers will be better off or see no change in their borrowing costs which hopefully means many will be able to budget better and even start to save money to protect themselves against future financial difficulty.
While the new rules now mean many consumers who regularly use an unarranged overdraft will see a decrease in their cost of borrowing, some who have an arranged overdraft may see the true cost of borrowing is actually higher. As with any credit product, it’s always best to shop around and compare products to find a service that is affordable and suits your financial circumstances, and this is being advised to those people who are now paying more to borrow through their overdraft.
Although overdrafts are a convenient way of borrowing money as they’re attached to your normal bank account, they can make budgeting and keeping control of your finances difficult, especially if you come faced with an unexpected bill.
However, there are overdraft alternatives which may help distinguish between money you have earned and money that you’re borrowing. Alternatives include:
Polar Credit offers a credit line which acts a little bit like an overdraft in that you can borrow money as and when you need to throughout the month. However, unlike an overdraft, the funds will go straight into your bank account and if you can’t afford to repay the full balance one month, you can just make a minimum payment instead. In this way, credit lines could be compared to credit cards as well.
The application is online and as a credit line is a revolving credit facility, you only need to make one application and, if approved, you can withdraw from your credit limit and repay your balance however it suits you financially – as long as you do make at least your minimum payment on time!
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