New online overdraft system launched

pounds and calculator

Until now, if you've needed an overdraft your only option has been your bank and if you didn't like its unfriendly fees and charges the only alternative was to find a current account with better terms and go through the rigmarole of switching banks.

That looks set to change with the launch of Frodo Flexi, an innovative online overdraft that you can run alongside your existing current account.

Once a credit limit has been agreed, account holders can take advantage of a rolling cash facility to pay for goods and services direct with more than 2,500 providers or simply top up their current account. All online purchase made with Frodo also have the same protection as credit card transactions under section 75 of the consumer credit act.

How are they different?

Unlike ordinary overdrafts, which charge interest, fees and penalties when you go over your limit, Frodo charges a straightforward 16.9% APR on any money spent and makes no additional charges if the account isn't used. Charges will only be levied if customers miss a monthly payment.

Customers can clear their bill in full or in part but must pay a minimum 10% each month. However, unlike credit cards, where borrowers usually get an interest-free period before charges rack up, interest on Frodo accrues immediately and is charged monthly. This means a balance of £1,000 over 30 days would cost £13.90.

Frodo Flexi will be limited to borrowers over the age of 21 earning more than £22,000 and seeking a credit agreement between £1,000 and £10,000. Frodo hopes it will appeal to those who suffer short-term cashflow problems such as the self-employed, small businesses and those who dip in and out of the red.

Kevin Lewis, chief executive for Frodo Financial, says that some eight million UK consumers are running over £8 billion worth of overdrafts, which is generating huge profits for the high street banks.

"My experience of seeking an overdraft suggests that customers often get a poor deal and the process of getting one is often cumbersome and difficult.

"The alternative is to look elsewhere which means changing your bank, which is equally painful. I felt that was wrong and so we are launching the Frodo Flexi account to give a better deal to those four million Britons who are permanently overdrawn and the two million who start their month in the red even after being paid," says Lewis.

The Moneywise verdict:

Frodo Flexi could certainly be the most innovative development in banking since the launch of peer-to-peer lending sites like Zopa, and many consumers will jump at the chance to take their custom away from the high street banks. With no fees, it's arguably more transparent than a traditional overdraft too, with penalties only being levied if you fail to repay 10% of your debt each month.

Once initial offers have expired, the interest rate is broadly in line with those being charged by high street banks, however some banks offer interest free overdraft buffers, such as First Direct which will not make any charges on the first £250. So if you only need to borrow a small sum make sure you check the terms on your own account first.

Frodo will provide quick credit too if you want to make a large purchase - however with many credit cards offering 0% for 12 months, this won't necessarily be the cheapest form of borrowing.

High street banks, however, are tightening their lending criteria. This will make Frodo particularly appealing to those who have been turned down for the most competitive credit cards and those who do not want to go cap in hand to their bank when they need an overdraft extension.

So while Frodo will provide a great alternative to the high street banks for those with very short-term borrowing needs, it may not always be the cheapest form of borrowing and could represent a real danger to those who have maxed out existing credit cards and overdrafts.

More about