While in an ideal world we should all have a budget and keep close tabs on what’s coming in and what’s going out of our bank accouts, that doesn’t always happen.
Despite the best intentions, there are times that a broken washing machine or expensive noise from the car catches us unawares.
When that happens, it’s necessary to find a solution – fast – to get your domestic show back on the road, at least until pay day – or in the case of freelancers that elusive day your client finally makes the bank transfer. I’m sure I’m not alone in juggling everything financial and practical while, at the same time, trying to look as though it’s all totally under control.
However, be warned that crossing your fingers and paying with your debit card might work out to be a dangerous strategy. An unarranged overdraft might be more expensive than taking out a payday loan, according to Which?.
This challenges common perceptions that short-term loans are the most expensive way of borrowing. Many people with broken washing machines or knackered cars might hesitate because they think ‘my kind of people don’t get that kind of loan’.
But charges on payday loans were restricted by the Financial Conduct Authority (FCA) in January 2015. A £100 loan from a payday lender, such as Vivus, has its charge now capped at £22.40.
On the other hand, going overdrawn without prior agreement can cost as much as £90 in some cases, according to Which?.
Banks say that borrowing like this is unnecessary – a last resort – and that they provide much more cost effective ways of borrowing. So it may well be worthwhile talking to your bank but, in many cases, the ‘crisis’ is only going to last a couple of days.
The cost of unarranged overdrafts was raised as an issue of concern by Andrew Tyrie, Westminster Treasury Select Committee chair.
He wrote to the main high street banks in the United Kingdom urging them to be transparent about their charges, especially for unauthorised borrowing.He said: “Consumers need to know what they are being charged for their bank accounts, especially their overdrafts. At the moment they often struggle to find out.”
He said: “Consumers need to know what they are being charged for their bank accounts, especially their overdrafts. At the moment they often struggle to find out.”
A comparison by Which? on the cost of borrowing £100 for 28 days showed shocking variety.
Customers of some Halifax accounts pay £5 a day up to a maximum of £100 and TSB, Lloyds and HSBC all charge up to £80. These fees add up – in 2014, UK banks made £1.2bn from such charges.
The fact that banks can make so much money on this sort of thing really does make me cross, butthe Competition and Markets Authority (CMA) which monitors such things is suggesting a cap on charges.
However, banks say they already have caps on fees and that unarranged borrowing fees are already much lower than they once were.
In any case, all banks advise their customers to use a planned overdraft where possible.
Which? said this was unlikely to make much of a difference, as most banks already
Banks advise their customers to use a planned overdraft facility wherever possible.
HSBC, for example, said borrowing £100 for 28 days through this method would only cost £1.40.
Alex Neill, director of policy and campaigns at the consumer organisation, said: “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.”
Do you know what your bank will charge for an unarranged overdraft? Find out before you make a costly mistake.