As highly risky financial products, unauthorised overdrafts should only ever be used if a person comes up against an unexpected expense that cannot be dealt with by other means. While authorised overdrafts are borrowing facilities that have been pre-arranged with a bank, those who make use of an unauthorised overdraft will have gained no such permission.
What is an Unauthorised Overdraft?
Usually, when a cardholder is expecting an upcoming payment or bill that will not be covered by the funds available in their current account, they will contact their lender to agree an extension to their overdraft to ensure the payment can be made. However, some expenses cannot be foreseen, or they may be foreseen but the lender will not agree an overdraft increase, for instance if the customer has set up automated payments (such as direct debits, standing orders, etc.) that take the account below any overdraft limit already agreed with their bank. If this happens, the account holder has an unauthorised overdraft.
A lender is still under no obligation to permit their customers to use such an unauthorised facility. Any withdrawals made over an account’s balance could be ‘bounced’ – i.e. a bank may choose not to accept them but will make a charge for returning the money.
Alternatively, a borrower may have a pre-arranged overdraft set up with their lender but go on to withdraw an amount over what they are permitted. This is considered as an informal overdraft request and customers will more often than not be charged a small fee for not making an arrangement with their bank prior to borrowing more money. If this becomes a regular occurrence, they will not only face a set of expensive fees, but their credit rating will suffer and so they will not be eligible for an extension to their overdraft limit until they manage their finances better.
Unauthorised Overdraft Charges
As is plain, using an unauthorised overdraft facility can be incredibly expensive as banks and building societies will always try to discourage people from taking on, without permission, more debt than they can afford.
Unauthorised overdraft charges and overdraft rates are disproportionally high, when compared to those related to authorised overdrafts, and can vary depending on how much a cardholder is overdrawn by. Fees on bank accounts in this condition generally come in the form of interest and will be much higher than those charged for an authorised overdraft. The vast majority of lenders will charge £5 – £10 on transactions below £10, while purchases over £30 will generally attract a much higher fee – with some totalling over £40. An additional monthly unauthorised overdraft charge may also be levied on the customer just for the privilege of using such a service without prior arrangement. Alternatively, some banks and building societies can charge a daily fee for being in unauthorised overdraft. Though this fee is usually small compared to standard charges, over a few weeks it can end up being even more expensive.
Managing Unauthorised Overdrafts
Nevertheless, a person’s expenses are often unpredictable, and an unauthorised overdraft may be unavoidable in certain circumstances. It is always a worthwhile option for cardholders to arrange an overdraft facility ‘just in case’ to protect themselves from the expense of unauthorised borrowing. Whether an overdraft is planned or not, customers should still be aware that these borrowing facilities are intended for short-term cash shortages only and are not suitable for borrowing money over a long period of time; indeed having an unauthorised overdraft can damage a borrower’s credit rating.
Those who are still struggling with their finances are advised to seek advice from their bank if they require help managing their account. There are also many debt management charities and non-profit bodies offering free debt advice.