For many people in the UK, the overdraft is the most common form of borrowing. But, analysis by the consumer group Which? has shown that what many people consider being a relatively cheap source of short-term credit could be more expensive than the most costly UK payday loan.
In 2015 the FCA (Financial Conduct Authority) imposed price caps on the booming payday loan industry, which limited interest charges to 0.8% per day. However, current account overdrafts were not subject to the same rules, and some unplanned overdraft rates now dwarf the 1,509% interest charged by payday giant, Wonga.
In fact, some are now over 12 times more than payday lender charges, as Alex Neill, Director of Policy and Campaigns at Which? observes: "People with a shortfall in their finances can face much higher charges from some of the big high street banks than they would from payday loan companies."
Current account overdraft charges are also more opaque than other forms of borrowing, since each bank, and even each current account type, applies charges in a different way - some using a standard interest rate, other apply daily (and other) fees, that are unfamiliar to people who do not regularly exceed their overdraft limit.
Some high-street banks have hit back, stating that consumers are not intended to exceed their overdraft limit. Consumers that do expose banks to higher risks of default, and to some degree the punitive charges reflect that. However, the situation does raise questions as to whether the banks should accept individuals exceeding their overdraft limit whatsoever.
Calling for unauthorised overdraft fees to be brought into line with other credit products, Neill goes on "The regulator has shown it’s prepared to take tough action to stamp out unscrupulous practices in the payday loans market, and must now tackle punitive unarranged overdraft charges that cause significant harm to some of the most vulnerable customers.”