Does my Overdraft have too high an Interest Rate?

If you have a current account with a bank or building society then it is a likely that you will have an overdraft facility along with it. Overdrafts can often seem to have quite a high interest rate and you may worry that perhaps the one that you have is too high. It is useful to check this, but you need to be aware of other factors that might also affect the cost of your overdraft.

Authorised and unauthorised overdrafts

There are different types of overdraft and it is important to understand the difference if you are going to be comparing rates. An authorised overdraft is one that you have arranged with your bank or building society. They will give you a credit limit at an agreed rate. This means that anything you borrow from them will be charged interest at that rate.

An unauthorised overdraft is where you go beyond your overdraft limit or borrow money when you have not been offered an overdraft at all. These have different rates. These are usually much higher rates and so you will be charged more than you would be for an authorised overdraft.

Fees and charges

It is really important to be aware that you will not only pay interest usually on an overdraft. You will normally have to pay fees as well. With an authorised overdraft you will normally have to pay a monthly fee and with an authorised overdraft you will often have to pay a daily fee. The costs of these therefore can differ considerably and so it is really important to be aware of what type of overdraft you have or whether you have both when you start to compare interest rates with other overdrafts offered by other banks and building societies. You may find it tricky to find out what these fees are on the websites of the banks and building societies so you may need to contact their customer service departments in order to find out details.

Current account perks

It is also worth noting if you get any perks in your current account. Some people pay for an account and as a result get free insurance or other benefits. Others might get interest paid on credit balances and things like this.  These might be important if you are comparing accounts as you want to make sure that you can get the equivalent with other accounts that you are considering. You may benefit a lot from these and if you change to a current account with an overdraft that has a lower rate, you might actually miss out financially as a result of not having these things. You will need to do some calculations to work out how much they are worth to you in financial terms so that you can see if you will save money or not if you switch.

Other lender benefits

There may be some ways that the lender stands out form others which may make you feel that you would rather pay more interest and stick with them. It could be that you have a branch nearby, that they have good customer service or that they are easy to contact. There are many reasons that we might prefer to stick with one bank or building society over another. However, do be careful that your customer loyalty does not make you stay with a bank that is very much more expensive. 

So, although it is important to make sure that you are not paying to much for your overdraft, the interest rates are not the only thing that you should be looking at. There are other factors such as the fees and charges that could affect the total cost of it. You may also get other benefits form the account or perhaps feel that you would pay more just to stick with that particular bank or building society.

You also need to be aware of how often you use your overdraft. If you do not use it at all then the cost of it is irrelevant unless you think that it is likely that you will use it in the near future. If you do use the overdraft then you do need to make sure that you are getting good value for money. It might be worth considering whether getting an alternative loan to repay it could be worthwhile, as it could be cheaper, but you will need to be careful that you can afford the repayments and that you do not get overdrawn again and have two debts to worry about. It is all worth some serious thought though. It is good to check whether you are paying significantly more than you could be and decide whether you would be happy to change to a different bank and building society in order to save money. Think about how much money you would need to save in order to encourage you to move and then you can do some calculations and see if any meet that.

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