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What is an unarranged overdraft?

Posted 20 July 2016

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We explain what an unarranged overdraft is and the charges you need to be aware of.

If you have an unarranged overdraft, it simply means that you’ve withdrawn more money out of your current account than you had in it, without having an arrangement in place with the bank to borrow money beforehand.

Some people have arranged overdrafts, which means they have permission to withdraw a certain amount over what they have in the bank. If you borrow more than expected, or if you don’t have permission to go overdrawn at all, you’ll go into an unarranged (or unauthorised) overdraft.

What happens if I withdraw too much money?

If you try to make a payment from your account but there isn’t enough money in there to cover it, one of two things will happen. Either your bank will treat this as a request for an informal, unarranged overdraft and allow you to borrow the money, or they will refuse to cover the payment. 

What’s more, if you dip into an unarranged overdraft your bank will charge you for it – and these charges can be very high. How much they charge depends on your bank’s policy. And if your bank refuses to allow you to make the payment, such as a Direct Debit, you may still be charged. 

Most banks won’t charge you if you’ve only gone into an unarranged overdraft by £10 or less, or for a period of less than a day, but check with your account provider to make sure you know the conditions for your particular account.

Unarranged overdrafts in the news

If you’ve been keeping up with the news, you may have seen that Which? conducted some research into how much banks are charging people for unarranged overdrafts.

According to its findings, some banks are charging customers four times more than payday companies are allowed to charge. The research compared how much it would cost to borrow £100 in an unarranged overdraft for 28 days, and discovered that some banks charge £90, while the maximum that a payday loans company can charge to borrow the same amount for the same time is £22.40.

The Competition and Markets Authority (CMA) has said that banks should set their own maximum monthly fees and make sure their warnings are more prominent. They also want banks to make warnings very clear when they are about to charge someone for an unarranged overdraft. 

The Financial Conduct Authority (FCA) is the regulating body that sets the rules for how banks and other lenders must behave. In January 2015, the FCA capped the amount that payday lenders were allowed to charge people in interest at 0.8% of the amount that was borrowed per day.

Which? is now calling on the FCA to put a similar cap on the amount banks are allowed to charge for unarranged overdrafts.

How do I avoid these charges?

If you use an unarranged overdraft you could pay an initial fee, a daily fee and usually interest on the amount you borrow. But there are certain steps you can take to minimise the risk that you’ll accidentally go overdrawn and be charged for it. 

You need to keep a careful eye on your outgoings to make sure that you don’t use an unarranged overdraft. See if there’s any way for you to increase your income or decrease your outgoings – or both. You might find some ideas to help with this in our blogs – check out 6 ways to boost your income and are you leaking money for more tips.

If you get a text or email warning you that you’re going over your limit or that there’s an unpaid transaction, don’t ignore it. Some banks offer something called a grace period, which means they give you a certain amount of time to pay the money back before they charge you.

It also worth speaking to your bank to see if they offer the option of not having any sort of overdraft. Whilst this would mean that you’d never be able to make a payment that took you overdrawn, you’d have the peace of mind of knowing that you won’t be charged either. Most banks now offer basic bank accounts that can prevent you from going overdrawn.

Arranged overdrafts

When it comes to using overdrafts, it’s best to arrange one formally with your bank, or arrange for an extension to the one that you already have. Using an arranged overdraft occasionally isn’t necessarily a bad thing, as long as you know how you’re going to pay the money back. Typically borrowing via an arranged overdraft is far cheaper than unauthorised borrowing.

Find my solution

Struggling to make your repayments?

If you find you often dip into an unarranged overdraft, this may be a sign that something isn’t quite right with your finances. You may need to seek help and advice to put your money in order so that you have enough to cover your essential expenses each month. 

It might be possible for you to do this by tweaking your budget here and there to make sure you don’t overspend. But if the root of the problem is the fact you don’t have enough money left over after you’ve made your debt repayments, a debt solution might be able to help. 

There are a range of debt solutions available which cater for different needs. Our page will give you a great over-view of each one. If you’d like to find out which one is best for you, use one of the options on the left of the page and one of our expert advisors will help. 

Alternatively, there’s also lots of help and support available from the Money Advice Service.

by Christine Walsh

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.