Posted in: Overdrafts

Should I Have to Pay to get an Overdraft?

There are some lenders these days that will charge and arrangement fee if you want to get an overdraft. This is pretty new thing because the way that overdrafts work has changed fairly recently. Therefore, banks cannot charge in the way that they used to. It is good to make sure that you are aware of how they now work and then decide whether you think that it is worth paying that fee.

How do overdrafts work now?

It used to be the case that there were two types of overdraft. The arranged overdraft allowed you to borrow an amount agreed to with the bank and you would be charged a certain percentage of interest and maybe a fixed fee for going overdrawn as well. There was also and unauthorised overdraft where you would either borrow more than this agreed amount or you would borrow money when no overdraft has been arranged and you would often be charged a daily charge and a higher interest rate for this.

It was deemed unfair that these charges were so complicated. It was difficult to easily compare banks to see how much each was charging and it was confusing to calculate the costs with there being flat fees and percentage rates and therefore there was an overhaul. These days there is only one type of overdraft and interest is usually charged at 35-40% with no additional fees.

How much is charged?

So as you can see the charge is now around 35-40% interest. This is quite a high rate compared to some other types of borrowing. You may also find that some banks might charge an arrangement fee on top. This will cover the administration costs of setting up the account, but considering how much they are already making from the interest, it can seem a lot.

Is it worth it?

Whether you feel that paying this is worth it is very much a personal thing. If you are used to using an unauthorised overdraft and the high costs associated with that, this new system could mean that you will be paying less than before. However, if you were using an arranged overdraft before, then it is likely that these costs will be higher than you are used to.

It is good to think about whether you think that it will offer you good value for money. Consider what you are getting in return for borrowing. Obviously, you will be getting the money, but think about what the money is being used for. Is it worth paying this extra money? Is there an alternative to borrowing the money and is this better value? It is good to question yourself and also investigate the costs of other methods of borrowing that might be available to you as these could be cheaper.

You might also be well advised to compare the rates between different banks. Obviously, it is much easier to just get the overdraft from our bank that we have our current account with right now. However, this can be expensive and you may find that if you compare the rates between the different banks you will be able to see whether you can get a better deal which may mean that you pay less. Some banks may not charge a fee but they will all charge interest so make sure that you check both if you are trying to identify which will be the cheapest. So, in answer to the question posed, you will always have to pay for an overdraft and that will be an interest payment but there may be an arrangement fee as well. Whether you feel this is worth paying will depend on what you need the money for as sometimes we will be prepared to pay as we have no other choice of need some items we cannot afford and other times we can wait and save up or go without and it will not be worth the money.