In exchange for permitting their customers to borrow money via an overdraft, banks will usually charge interest, and though good deals can be found overdraft rates are often high. During a time where many people are struggling to make ends meet and often have no choice but to rely on an overdraft, it is always worth knowing the ins and outs of bank overdraft rates in order to choose the right product.
What are Overdraft Rates?
Cardholders are charged overdraft interest rates when they withdraw money from their bank accounts, causing their account balances to go below zero. They are usually calculated on either a tracker or standard variable rate, though both are based on the Bank of England base rate so any interest payable will reflect the market at that time. The borrower’s credit rating can also have an influence on the overdraft rate quoted.
Though overdraft rates will obviously differ between lenders, the interest charged is ultimately dependent on how much the borrower’s account has been overdrawn and whether the overdraft has been authorised by the bank or not.
Authorised Overdraft Rates
With overdrafts that have been pre-arranged, the interest rates for going overdrawn are typically lower than those for overdrafts that have not been formally agreed. Customers of authorised overdrafts agree an amount with their lender up to which they can borrow and will then be charged the overdraft interest rate if they remain within this limit. Usually, interest is calculated monthly and it’s possible there may be no charge when a person is overdrawn by £10 or under.
Unauthorised Overdraft Rates
Rates for unauthorised overdrafts, however, can be remarkably expensive. If a cardholder withdraws money they don’t have without first contacting their lender, or automated payments take out an amount over what the borrower’s permitted overdraft limit, a bank may allow this transaction to go ahead but will start charging interest daily. These overdraft charges can really add up and can sometimes work out at a fee of £5 per day, but can be higher depending on the amount a person is overdrawn by.
Interest Free Overdrafts
The best overdraft rates are those which cost nothing at all. Interest free overdraft deals are available on the market for a customer to take advantage of borrowing money for free up to a specified amount or for a set period of time. Certain people, such as university students, might even be offered interest free overdrafts for as long as their current account exists: banks and building societies are very competitive in providing student overdrafts.
Business Overdraft Rates
Completely interest free overdraft services are not widely available, though some deals will suit particular groups of people more than others. Business overdraft rates intended for those with a commercial current account can be negotiated with between the lender and borrower to suit specific needs for smaller and larger business ventures. As business overdrafts can have limits of tens of thousands of pounds, it is worth an account holder taking the time to consider the provider most suitable for them as the charged business overdraft rate could become very expensive, leading to significant debt problems.
Compare Overdraft Rates
A pricy bank overdraft rate should not nevertheless put a person off taking out such a service as they are still considered as being one of the most cost effective lending options. Cardholders are advised to compare overdraft rates on the market as different lenders offer the best overdraft rate deals to suit people in different financial situations.