UK overdraft charges: how the interest really works
UK overdrafts are now priced more simply than they used to be, but they can still be expensive. The useful comparison is the annual interest rate, how long you expect to stay overdrawn and whether a cheaper form of borrowing is available.
Since the 2020 FCA reforms, banks cannot charge a higher price for an unarranged overdraft than an arranged one and cannot use fixed daily or monthly fees for overdraft borrowing. Providers quote a simple annual interest rate, but the actual cost depends on the amount borrowed and the number of days you remain overdrawn.
The rate is annual, the cost is driven by days
An overdraft rate such as 39.9% EAR looks like a yearly number, but interest is normally calculated on the overdrawn balance over time. Borrowing £500 for five days is therefore very different from living £500 overdrawn for five months. The short-term convenience can hide a long-term borrowing habit.
For a rough illustration, £500 at 39.9% for 30 days is about £16 of interest using a simple annual approximation. The bank’s actual calculation can differ because interest is calculated daily and compounding conventions vary, but the example shows why duration matters as much as the headline rate.
Practical check: Your account is £350 overdrawn for nine days and the bank quotes one annual interest rate for the overdraft. Write down the amount, date, deadline and channel before you act, then compare the annual interest rate, any interest-free buffer, number of days overdrawn and whether the account is a personal current account covered by the FCA overdraft pricing rules. Estimate cost from the amount and time used, then compare that with a cheaper borrowing or repayment option rather than focusing on an old-style daily fee that may no longer apply. Keep account tariff, daily balance, interest entry and any overdraft alert together so a later conversation with the bank starts from a verified record rather than memory.
Current FCA overdraft pricing rules require personal-current-account overdraft borrowing charges to be expressed as a simple annual interest rate. They also prevent an unarranged overdraft from being priced above the relevant arranged overdraft rate and ban most separate fixed fees for overdraft borrowing.
Arranged and unarranged no longer mean two price systems
Before the FCA reforms, unarranged overdrafts could attract complicated daily fees and much higher charges. The rules introduced in 2020 stopped firms from charging a higher price for unarranged than arranged overdrafts and banned fixed fees for borrowing through an overdraft.
That does not make an unarranged overdraft harmless. Payments can still be refused, the account can breach its terms and repeated use can be a sign that the current account no longer fits the customer’s cash flow.
Use a small decision table for this situation. Start with Your account is £350 overdrawn for nine days and the bank quotes one annual interest rate for the overdraft. Verify the annual interest rate, any interest-free buffer, number of days overdrawn and whether the account is a personal current account covered by the FCA overdraft pricing rules before choosing. That prevents one unclear detail from driving the whole decision. Estimate cost from the amount and time used, then compare that with a cheaper borrowing or repayment option rather than focusing on an old-style daily fee that may no longer apply.
Use the overdraft for timing problems, not permanent debt
An overdraft can make sense for a short gap: £180 of car repair on Tuesday with salary arriving Friday. It is much less attractive if the account is £800 overdrawn on every payday and only reaches zero for a few hours. In that pattern, the overdraft is functioning like expensive revolving debt.
Compare alternatives using total cost, not the monthly payment alone. A small personal loan, credit-union loan or structured repayment plan may be cheaper for a debt that will take many months to clear, although eligibility and flexibility differ.
For Your account is £350 overdrawn for nine days and the bank quotes one annual interest rate for the overdraft., preserve account tariff, daily balance, interest entry and any overdraft alert. Put the items in date order and add a short note explaining what each item proves. Do not bury the key fact inside dozens of screenshots. Estimate cost from the amount and time used, then compare that with a cheaper borrowing or repayment option rather than focusing on an old-style daily fee that may no longer apply.
Alerts can save more than rate shopping
Banks provide balance and overdraft alerts because timing can prevent interest. If a £300 card payment will push the account below zero at 4pm, moving £300 from savings before the end-of-day balance is assessed may avoid or reduce borrowing depending on the provider’s calculation rules.
Set low-balance alerts above zero, not exactly at the overdraft line. A £100 buffer gives time to act before several small card payments arrive together.
Worked decision point: Your account is £350 overdrawn for nine days and the bank quotes one annual interest rate for the overdraft. Before taking an irreversible step, verify the annual interest rate, any interest-free buffer, number of days overdrawn and whether the account is a personal current account covered by the FCA overdraft pricing rules through a channel you chose yourself. Estimate cost from the amount and time used, then compare that with a cheaper borrowing or repayment option rather than focusing on an old-style daily fee that may no longer apply. If the bank applies a separate overdraft borrowing fee or prices an unarranged overdraft above the relevant arranged rate, compare the charge with the current FCA rules and raise it with the bank.
What to do if the overdraft never clears
Write down the highest overdrawn balance each week for a month. If the number is not falling, stop treating the overdraft as a temporary facility and contact the bank before missed payments start. FCA rules require firms to identify and support customers showing signs of financial strain.
Ask what support is available and what effect any arrangement could have on the account or credit file. The goal is a repayment path you can actually sustain, not a one-off transfer that leaves the same shortfall next month.
To see whether an overdraft is becoming structural, compare the balance on the same day each month. If you are £450 overdrawn the day before payday in May, £520 in June and £610 in July, the trend matters more than whether the bank's rate is 34.9% or 39.9%. At that point the account is financing a recurring budget deficit. Reducing subscriptions, moving bill dates or consolidating expensive debt can matter more than switching to an overdraft that is only a few percentage points cheaper.
Also compare the overdraft with the cost of a missed payment. Paying a few pounds of overdraft interest to ensure a mortgage or council-tax payment clears can be cheaper than allowing the payment to bounce and triggering a charge or arrears marker elsewhere. That does not make overdrafts cheap borrowing; it means cash-flow decisions should be made across the whole household. If you are repeatedly choosing between overdraft interest and failed essential payments, ask the bank and creditors for support before the cycle becomes harder to unwind.
Sources and verification
James Whitmore
The overdraft number I care about most is not the EAR by itself; it is how many days each month the account is below zero. A high rate used for three days can cost less than a lower rate used continuously. If the overdraft is still there on every payday, I would stop optimising pennies of interest and redesign the repayment plan, because the product is being used for a job it was not meant to do.
MyBankAnswers uses official provider and UK regulatory sources wherever practical. Information is general and does not constitute financial advice.