Overdraft charges could cost more than payday loans

Which? is calling for the regulator to act on un-arranged overdraft fees after new research finds charges from big high street banks could cost up to 180% of the amount borrowed. The Which? research has found that  consumers needing as little as £100 could be charged up to £156 more by some major high street banks than the Financial Conduct Authority (FCA) allows payday loan companies to charge, when borrowing the same amount for the same period.

Which? compared the cost of borrowing £100 for 30 days and found that un-arranged overdraft charges at some high street banks were as much as 7.5 times higher than the maximum charge of £24 on a payday loan. Because bank overdraft charges apply to their monthly billing period, not the number of days the money is borrowed for, consumers who need £100 could pay up to £180 in fees if they borrow across two billing periods.

During its review of the retail banking market, the Competition Markets Authority (CMA) found that over half (51%) of overdraft users went into an un-arranged overdraft at some point. However, attempts by the CMA to curb un-arranged overdraft charges are not going to tackle these exorbitant fees Which? is calling on the FCA to use its High-Cost Short-Term Credit Review to crack down on punitive un-arranged overdraft charges. Banks, which set their own monthly maximum charges for overdraft borrowing, should not be able to charge more for un-arranged overdrafts than they do for arranged overdrafts.

Vickie Sheriff, Which? Director of Campaigns and Communications, said: “It’s not right that people with a financial shortfall can be charged so much more by the big high street banks than they would by a payday loan company – especially if the money is borrowed over two monthly charging periods. If banks can continue to set their own charges, then consumers will continue to be hit by exorbitant fees. The Financial Conduct Authority must use its current review to cap these high charges and ensure consumers cannot be charged more for un-arranged overdrafts than arranged overdrafts.”

Mike O’Connor, Chief Executive at StepChange Debt Charity, said “This research shows some of the serious problems that overdrafts can cause and further highlights the need for urgent action. Every day we help people who have regularly exceeded their overdraft limit and been hit with extra fees and charges. This has made getting back on track the next month an even more difficult challenge.

“Our latest research shows that 2.7 million people a year now use overdrafts just to meet everyday expenses  Without action, hundreds of thousands of people risk being stuck in a borrowing cycle, trapped by spiralling fees incurred through just trying to make ends meet. The time has come for the FCA to cap un-arranged overdraft charges and look at the widespread problem of persistent overdraft debt.”