Payday loans, short-term loans, instalment loans, whatever you want to call them, these variations along a very similar theme have often received the wrath of the press and the regulators for what were notoriously high APRs. An APR is the annual percentage rate of interest, and this figure tells you how much interest you will pay on the loan over the period of a year.
However, over the last few years, much has changed. Intervention from the regulators means many of the payday lenders have cleaned up their acts. Lenders like Wonga have reduced their interest charges and the additional fees that apply, which is why, for the large part, we no longer hear so much about them. But while one part of the short-term lending family is now fit for purpose, another seems to be losing its way.
Overdraft costs are soaring
Over the last couple of months, overdraft charges at many of the leading banks have soared, leaving unsuspecting consumers to pay rates of interest equivalent to 894% APR. This is because, in many cases, the banks have switched to charging daily or monthly fees, sometimes even in addition to annual interest charges. You might think this is to be expected when entering an unauthorised overdraft, but these charges are being introduced for overdrafts that have already been agreed with the banks.
Particularly expensive for larger overdrafts
The fixed fees that have been introduced are particularly expensive for larger overdrafts that are in place for a longer period of time. Research has found that one in 10 people dip into their overdraft every month, which means millions of people are already feeling the pinch.
The impact the new overdraft charges will have depends on a number of factors. That includes:
- How much you’re overdrawn
- How the charges vary depending on the amount you’re overdrawn
- How long you’re overdrawn for
- Which bank you’re with
What can you do?
If you suddenly find yourself saddled with a significantly higher overdraft bill then there are a number of things you can do:
- Option 1 – Switch bank
You could find another bank with fees that better suit your usage. The overdraft fees with every bank are different, so while some might favour smaller overdrafts, others might be better suited to those who are significantly overdrawn. You’re also likely to receive a cash bonus for switching banks which you can put towards paying off your existing overdraft.
- Option 2 – Pay off your overdraft with a 0% credit card
Rather than getting stung by rising charges, shift your overdraft to a 36-month 0% credit card. This is a particularly good option with bigger overdrafts. One-off fees apply when making the transfer so factor those into the cost. You can find out more here.
Option 3 – Better budgeting