Credit, Collections & Insolvency News
The Financial Conduct Authority (FCA) says seven out of ten overdraft users will be better off or see no change when the new rules on overdrafts come into force in April.
The says around 14 million people use an unarranged overdraft each year, and all of these users will be better off or see no change. The FCA’s work highlighted that unarranged overdraft prices were regularly 10 times – and for some consumers as much as 20 times – as high as for payday loans. Customers at some large banks were charged effective arranged overdraft rates in excess of 80% per year once fees and charges are factored in.
The cost of borrowing £100 through an unarranged overdraft is expected to drop from a typical £5 per day to under 10p per day. For an unarranged overdraft user borrowing £100 for 7 days, the changes to the market could see them better off by as much as £55.35 a month. Those who use their arranged overdraft to borrow smaller amounts are more likely to be better off. Some borrowers who use their arranged overdraft to borrow larger sums can now see the true cost of borrowing. Where prices have increased, the FCA encourages people to shop around and consider using cheaper forms of borrowing, such as a 0% credit card, other credit card or alternative products.
Firms must now charge a simple annual interest rate – without additional fees and charges for using an overdraft. This means that while headline interest rates have increased, the cost of borrowing has gone down or remained unchanged for most people. It will also be easier for everyone to understand what they’re paying, and to compare overdrafts between different providers and different forms of credit. FCA research previously found that 4 out of 5 overdraft users couldn’t work out which of a range of overdraft models was the cheapest.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said “Our changes expose the true cost of an overdraft. We have eliminated high prices for unarranged overdrafts. This will result in a fairer distribution of charges, helping vulnerable consumers, who were disproportionately hit by high unarranged overdraft charges, and many people who use their overdraft from time-to-time.”
“Seven out of ten overdraft users will be better off or see no change. At two banks that figure is 9 out of 10. Consumers can now see how expensive overdrafts really are. Those who are worse off should consider shopping around to find a cheaper deal. Credit and other forms of borrowing can be significantly cheaper for long-term users.”
Out of the 6 largest retail banking groups analysed, there are some scenarios where consumers will pay more. People who are likely to pay more for an overdraft are those borrowing larger amounts for longer periods of time, who should consider alternatives to borrow more cheaply.
Christopher Woolard continued “Overdrafts were not designed to be used for large amounts for long periods of time. Consumers should consider other methods of credit if they find they need to borrow for longer. In addition to this, we have made it clear that firms have to treat all customers who are affected by changes to their charging structures fairly. In particular, firms must identify customers adversely impacted and take steps to support them if they’re in difficulty.”
In a related announcement, Lloyds Banking Group has announced that its customers will be charged ‘personalised’ rates of up to 49.9% from April, but most will pay a rate of 39.9% to go into the red. The latter is the same rate as planned by many of the major High Street banks.
John Crossley, Head of Money, comparethemarket said “Lloyds Banking Group is the latest high street bank to increase overdraft rates, ahead of the new FCA rules coming into effect in April 2020. Lloyds has said it will decide a customer’s interest rate based on their credit rating – similar to Monzo and Starling – but Lloyds, including Bank of Scotland and Halifax Bank, customers with a low credit score could see their overdraft rates jump as high as nearly 50% – the highest amount we’ve seen announced so far. Customers should take note of these new overdraft rates and consider switching current account to a better deal with potentially lower overdraft rates. Equally, if you need to borrow money, using a 0% credit card can be a more cost effective option than dipping into your overdraft.”