This year has already seen some big changes in the financial industry, not least because of Covid-19, however, one change which may have slipped under the radar amongst the pandemic chaos was the new rules and regulations that have been applied to overdrafts since the beginning of April 2020.
The changes came after huge calls for overdraft reform, mostly to protect vulnerable customers who were relying on unarranged overdrafts and consequently being charged enormous fees for their borrowing, but also to make comparing overdrafts clearer and easier for everyday consumers.
Essentially, an overdraft is a type of credit. It is attached to your normal current account and allows you to spend more money than you currently have in there. There are two types of overdraft: an arranged overdraft and an unarranged overdraft, the main difference being that the latter is not pre-approved by your bank.
Most of the new changes to overdrafts will affect people who use unarranged overdrafts and, in most cases, will make their borrowing considerably cheaper, however there are some who use an arranged overdraft who may see their costs of borrowing increase. This is because, with the exception of an agreed buffer, most banks will no longer offer a 0% interest rate.
The changes aim to make comparing overdrafts clearer by replacing daily and monthly fees with a set annual percentage rate, often cited as APR. This means, instead of trying to work out the cost of borrowing £100 by compiling different fixed rates, you can now compare one simple interest rate. At the moment, most banks seem to have opted for around 39.9% as their representative APR, although as the changes settle in, competition in the market may see these interest rates fluctuate which is why it’s important to continually compare overdrafts across a range of banks to ensure you are always getting the best deal.
While 7 out of 10 overdraft users will be better off or see no change, previously, a 0% overdraft meant you could borrow up to your limit and not worry about paying the full amount off each month (as you were not being charged interest on the debt) but it does mean that now many people will suddenly find they are paying far more than they used to for the same borrowing patterns. If you fall into this category, it’s advisable that you look around and see if there are other borrowing options that are more suited to your borrowing needs. For example, credit cards, credit lines or even a personal bank loan may now be cheaper than your arranged overdraft.
While there are many alternatives to overdrafts, finding one that suits your needs might be more challenging. If it’s something like a one-off emergency expense, then you might opt for a short term loan. For a larger payment, it might make more sense to put it on a credit card because of the added consumer protections, but if you’re looking for something in between – maybe a flexible source of credit to help you manage your monthly cashflow – then a Polar Credit Line might be just the help you need.
Cash withdrawals go straight into your bank account and there’s the option of making only a minimum payment if money is a little tight one month. Plus, Polar Credit’s commitment to sustainability means your responsible borrowing will be rewarded with decreasing interest rates over time so that it costs less and less to borrow with us.
While you might be looking to change your credit providers, make sure you repay any outstanding debt before applying for further credit. Not making your repayments on time can cause you serious money problems and make credit harder to obtain in the future.
If you don’t understand how the new changes affect you directly, then get in touch with your bank or building society as they should be able to advise you further. Similarly, if you are now finding it difficult to manage your cashflow because of the changes, your bank should be able to offer you support or point you in the direction of free debt advice services such as StepChange and National Debtline.
Want more information? Check out our Info Hub.