Alternatives to high cost overdrafts?

Many of us now use overdrafts as part of our everyday banking, but this could in effect be costing us more than we think and are there any cheaper alternatives?

The Financial Conduct Authority (FCA) has already confirmed that overdrafts fees are extremely difficult for consumers to understand, especially when they are ‘unauthorised’. In research conducted by Moneycomms they confirmed that customers of the seven biggest high street banks are being charged as much as 81% interest on an agreed overdraft limit of £500 for a seven day period.

Indeed, Lloyds Banking Group which includes Bank of Scotland and Halifax have now scraped all unauthorised overdraft fees, reverting to a flat rate of 1p for every £7 of planned overdraft used. Whilst definitely a step in the right direction this is still a 52% interest rate.

So, should you need to borrow money, Andrew Hagger of Moneycomms says: “For some people a bank overdraft can be very expensive with fixed monthly or daily fees becoming more commonplace. It’s worth looking at other options such as unsecured loans from Peer to Peer (P2P) lenders or being smart with credit card offers.”

Unsecured Loans

Although the base rate of interest has risen, this will not necessarily impact upon unsecured loans in the immediate future. Mr Hagger has picked out three good deals for a £1,000 amount over a 12 month period, as opposed to using an overdraft.

  1. Saga 7.9% APR (over 50’s only) – total payback £1,041.84
  2. Nationwide Building Society 15% APR – total payback £1,077.72
  3. AA Loans 17.9% APR – total payback £1,092.12.

Peer to Peer lending

P2P lending is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. The rates of interest are often higher than any regular savings account on the high street.

Again according to Hagger looking at £1,000 of borrowing over a 12 month period the best deals are:

  1. RateSetter 9.5% APR – total payback  £1,050.00
  2. Zopa 9.5% APR – total payback  £1,050.00
  3. Lending Works 14.7% APR – total payback £1,076.28.

Credit Cards

Although credit card offers have been in decline somewhat, there are still some available that may suit your needs. However it’s worth remembering that once the promotional rate ends you may be paying in excess of 19%, so try and clear the balance before the rate ends by setting up a direct debit for the amount required to clear it in time.

Best current deal is 0% on purchases for 31 months from Sainsbury’s Bank. 0% purchase cards allow you to buy items and spread the cost without paying any interest. This card comes with a 18.9% rep APR.

Alternatively, Hagger lists the MBNA 5 credit card which charges 4.9% typical APR for five years. If you wish to transfer money to your bank account, so say £1000 for example there is a one of transfer fee of 0.5% so £5, and the rate of interest is 4.9% which equated to around £4.16 per month.

So don’t get caught in the expensive overdraft trap, dipping in and out of them throughout the year is continually costing you money. Try one of the alternatives and see if you can save money.


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