Overdrafts can cost as much as payday loans
Some high street banks' overdrafts cost as much to run as payday loans, according to consumer group Which?.
The consumer rights group's research found that borrowing £100 using an authorised overdraft with Halifax for 31 days costs £30, or £20 with some Santander accounts. That compares with costs of between £37 and £20 for borrowing the same amount over the same period from payday lenders.
The consumer group warns that just like the way borrowers rolling over payday loans rack up sky-high charges, the same applies when bank customers use an unauthorised overdraft.
Again, Which? made examples of Halifax and Santander. The Halifax Reward current account and the Santander Everyday Account can levy £100 in charges for going £100 into an unauthorised overdraft for a month.
The Financial Conduct Authority will start regulating the payday loans industry in April and has proposed a series of new rules to improve how the companies treat their customers. For example, strict affordability tests must be carried out before loans are made.
However, high penalty and default fees for payday loans, overdrafts and other high-cost credit products won't be subject to reform and Which? believes more must be done. It is now campaigning for the entire consumer credit market to be cleaned up.
Richard Lloyd, Which? executive director, said: "The Government and regulators have rightly focused on the scandal of payday lending, but they must not lose sight of the urgent need to clean up the whole of the credit market. High street bank overdraft fees can be just as eye-watering as payday loans.
"Consumers need the credit market to work competitively. It's time to clamp down on excessive charges and irresponsible lending, and to make sure borrowers are being treated fairly whatever form of credit they're using."
Which? is proposing five improvements:
- A ban on excessive default fees and charges
- A crack down on irresponsible lending
- Put people in control of their credit (by ending automatic increases in credit limits and making unauthorised overdrafts opt-in only)
- Clearly display the full cost of credit over 30 days, including all fees and charges, in pounds and pence
- Force lenders to freeze charges for borrowers in difficulty.
Payday loan trade body the Consumer Finance Association (CFA) supports the campaign. Russell Hamblin-Boone, CFA chief executive, said: "CFA members are responsible payday lenders who are committed to transparent communication with no hidden charges, so we fully support Which?'s call for all consumer credit providers to step up to the mark.
"People want and need clear, jargon-free information to help them make better financial decisions. Indeed, our own research shows that three quarters of people would prefer to compare financial products in pounds and pence and often have no idea how much it costs them to borrow money because charges are hidden or disguised by confusing APRs. So it is right to level the playing field."
Short-term cash loans designed to be borrowed mid-way through the month to tide the borrower over until they next get paid, whereupon the loan is settled. Generally used by people with bad credit ratings and/or no access to short-term credit such as an overdraft or credit card. Like logbook loans, this type of borrowing is hugely expensive: the average APR on payday loans is well over 1,000% and in some instances can be considerably more.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.