Taking out an overdraft can be a cost effective lending option for holders of bank accounts who use their accounts to make regular payments, but occasionally have trouble paying them on time. However, for those people whose income is insufficient to cover these payments, an overdraft may be very costly as they may be liable to punitive overdraft charges.
What are Overdraft Charges?
Far from lending money for free, banks usually impose overdraft charges, which can be substantial. Whether a person has an authorised overdraft or an unauthorised overdraft, lenders will usually charge a set rate of interest for any money borrowed. Therefore any borrower wishing to take out this type of debt should research the relevant overdraft rates as well as overdraft charges: banks and building societies can shield the true cost of an overdraft with offers such as interest free overdrafts for a set term.
How do Overdraft Charges Work?
With an overdraft that has been pre-arranged with a bank, interest (if applicable) will be charged once the cardholder becomes overdrawn. Some banks do not levy this overdraft charge until a person has borrowed more than £10, and they have failed to repay this amount by a set time that day. Interest will then be billed, usually monthly, and calculated on a tracker or variable rate basis.
This bank overdraft charge can be quite reasonable if a cardholder has shopped around for an overdraft with a decent rate, though this stops being the case if the overdraft limit is exceeded. An unauthorised overdraft charge can be very steep as it is calculated not only by the amount a person has gone over their limit by, but the full amount that has been overdrawn.
Unauthorised Overdraft Charges
Equally, a cardholder will receive a hefty penalty if they have not gained the permission of their bank to borrow their money. These unauthorised overdraft charges will be imposed if a person has already tried withdrawing money and the lender either agrees to an informal overdraft request or doesn’t. Interest is calculated daily on an unplanned overdraft, which can add up to a very high amount. In addition to this, if a lender has rejected a customer’s informal overdraft request, additional charges will be levied: these vary from bank top bank, but an example charge is a £10 returned item fee up to a maximum of three returned withdrawals a day. A succession of such charges is to be avoided, as it is likely to damage the borrower’s credit rating.
Various other bank overdraft charges will also contribute to this costly bill such as a monthly usage fee and possibly an arrangement fee when first setting up an overdraft facility. It should also be noted that charges for business overdrafts may also reflect other account factors, such as the amount of money entering or leaving the account in a given period.
Unfair Overdraft Charges
Though these fees will more than likely be specified in the terms and conditions of a cardholder’s account, all financial providers are still required to treat their customers fairly. A person may have been levied with an unfair overdraft charge if they unintentionally slipped over their limit by a few pounds but are then charged a disproportionate fee.
Those who feel they have been subject to unfair overdraft charges are advised to try recovering some of the money back they are owed. Cardholders can reclaim overdraft charges by writing to their lender, specifying any financial hardship they may be going through and how these fees have affected their financial situation. Claiming back overdraft charges can still be a lengthy process, particularly if a bank refuses to hear a case out. Depending on the amount of the unfair overdraft charge that is being recovered, claimants could be recommended to contact the Financial Ombudsman to take their case further.