It is now illegal for banks to charge the £5 a day late fees on an unarranged overdraft. This law comes into effect in April and is aimed at protecting the vulnerable from being exploited and put into more debt when they are already in a difficult position (the sort of position where you spend more money than you have in your bank – unarranged overdraft).
For many, an arranged overdraft provides a cushion for when unexpected costs throw out your monthly budget and you don’t have savings to buffer it – ie a leak in the ceiling or the car breaking down. For most of us, this isn’t too much of an issue and when we get paid next, we can quickly rectify the situation and put ourselves back in the black.
Natwest started upping their overdraft interest rate to 39.9% EAR, almost 3 times what was standard and in response to the recent law change – HSBC and First Direct, along with a few others, are quickly following suit. This means, that where they are no longer able to exploit the vulnerable in their time of need through an unarranged overdraft, they instead exploit the vulnerable by upping their interest rate far beyond a manageable amount.
For context – I have a loan I’m paying off. When I was in a really bad space and had to consolidate my debts – it was at 13.5% EAR. I’ve now shifted it to a lower interest loan and as a result – saved myself a lot of money.
But for a short while both at uni, and as a graduate, I was in the red consistently, month after month, and regularly hitting the bottom of my overdraft because I was working on minimum wage and trying to support myself with a waitressing job, following a brief period of unemployment. If at that time, I had been paying 39.9% on my overdraft, I would have been in serious trouble. I already couldn’t make ends meet and regularly got the update from my bank to tell me I was in my unarranged overdraft.
I am no longer in that situation, and arguably don’t need my overdraft, I’m very fortunate to be in that situation again. But this isn’t true for all of us and I feel for the people that will be affected.
As of March, it’ll be cheaper to get a loan than it will be to use your arranged overdraft with HSBC, Natwest, First Direct and more. For some, who may have a bad credit rating, taking out a reasonable and affordable loan just isn’t possible – which means this change is putting people at risk of dangerous payday loans, and an even more vicious cycle of debt.
Worst still, HSBC is branding these changes as positive and advertising it as a way to help people stay on top of their finances. Nothing could be less true – this is a thinly veiled attempt to recoup the finances that will be lost through their unarranged overdraft scheme, instead of charging both arranged and arranged overdraft at extortionate rates so they don’t lose out on cash.
For those of you that need help or advice with this change, please do contact these debt advice charities. You can get help controlling your money, and we will be running some money management help education over the next few months to help us all get a better handle on our finances.