The app-only banks with the most flexible overdrafts and the lowest charges.
An overdraft is a flexible form of credit that can get you out of a jam, but can dig yourself into a hole if your not careful.
It’s important to remember that an overdraft is debt borrowed from your bank. An arranged overdraft can be a useful way to avoid fees from bounced payments for bills that happen when your account doesn’t have enough cash in it. This form of credit allows you to pay money back without being charged early repayment fees.
“But overdrafts should only be an emergency fund or short-term credit option,” according to government-backed Money Advice Service.
There are two types of overdraft, and these carry different interest rates and fees and kick in when your balance falls below £0.
Arranged overdrafts - Also, called authorised, or formal, overdrafts are agreed with your bank up to a certain limit which may be reviewed on a regular basis. Most banks charge for this type of facility.
Overdraft charges might be made up a fee which could be daily (typically between 50p and £3 a day), weekly or monthly. It might also consist of interest, which can be up to 15 to 20 per cent equivalent annual rate (EAR).
Unarranged overdrafts - This happens when you are overdrawn, or when you go beyond the overdraft facility arranged with your bank. Extra charges can mount up here very quickly.
They can consist of a monthly fee of anything from £5 to £35 or more. A daily fee of £1 to £6 or more (up to a set cap per month). Transaction fees may also be charged, these can be between £10 to £25 for every cash withdrawal, direct debit or standing order, cheque or card payment you make – whether or not your bank allows the payment.
If you are living on your overdraft from month to month, or regularly falling into unarranged overdrafts, this could damage your credit scores. Bank customers in this situation, should cut back on their spending, switch to a bank account with an interest-free, fee-free overdraft facility, or apply for a personal loan, which is more suitable for long-term borrowing.
It’s also is worth remembering that banks can withdraw this service at any time, which could leave you short on cash you had come to depend on.
Here are the best overdraft facilities offered by digital banks.
The London-based challenger bank charges 15 per cent equivalent annual rate for arranged overdrafts. No other fees apply.
Charges £2 a month for unarranged overdrafts as well as the standard rate of interest. Will waive charges if your monthly overdraft interest comes to less than 10p for the month. Operates a monthly fee cap of £2.
Customers with arranged overdrafts are charges a 50p charge every day your account is overdrawn by more than £20, up to a maximum charge of £15.50 a month. No other fees apply.
It has the same fee structure for unarranged overdrafts, but the bank’s policy in this situation is to reject bill payment requests that take you, or keep you, overdrawn.
The digital bank gives all customers a £20 buffer if they become a little overdrawn, where no charges will be levied.
The digital lender, launched by Clydesdale and Yorkshire Banks in 2016, charges a 12.5 per cent equivalent annual rate on arranged overdrafts. On top of this it charges a fee of £6 a month. The bank charges £6 a day for unarranged overdrafts.
It charges £15 for each item it refuses to pay on an overdrawn account, although this will not be levied if the value of the item is £15 or less. The lender operates a monthly fee cap of £100.
The bank gives customers a grace period of two working days to get your account back in the black, or within agreed limits, whereas most banks give you until midnight on the day you are notified. It gives customers with arranged overdrafts a £25 buffer, before fees are charged, and a £10 buffer for those with unarranged overdrafts.
The Berlin-based app-only bank, with more than 2 million customers in 24 countries, said it will launch an overdraft facility for its 200,000 UK account holders “soon.”
Few details have been released, but it will charge 14.9 per cent equivalent annual rate on arranged overdrafts, according to a four-page company pricing document.
It will charge the same equivalent annual rate for unarranged overdrafts, and “will not charge you more than £80 per calendar month for an unarranged overdraft or any unpaid transactions”.