Overdrafts in the UK: How They Work
An arranged overdraft is a pre-agreed borrowing facility attached to a current account, allowing the account balance to go below zero up to an agreed limit. It is one of the most widely used forms of short-term credit in the UK. The FCA regulates overdraft pricing under its Consumer Credit sourcebook (CONC) and its 2020 reforms (PS19/16) — which banned fixed daily and monthly fees and required all banks to price overdrafts as a simple annual interest rate (APR) to make costs more comparable. This guide compares overdraft rates across UK banks, explains the FCA rules, and helps you choose the best account for overdraft use.
The FCA's 2020 Overdraft Reforms
Before April 2020, UK banks charged overdraft fees in a confusing variety of ways — daily fees, monthly fees, and separate "unauthorised overdraft" charges that could make going £10 overdrawn cost £90 in fees. The FCA's Policy Statement PS19/16 required all banks to:
- ▸Charge a single annual interest rate (APR) on all overdraft borrowing.
- ▸Stop charging higher rates for unauthorised (unarranged) overdrafts than arranged ones.
- ▸Ban fixed daily and monthly overdraft charges as a primary pricing model.
- ▸Make all overdraft charges transparent and comparable across providers.
The result: most UK banks now charge between 19.9% and 39.9% APR on arranged overdrafts. This is significantly higher than many other forms of credit (mortgages, personal loans) and means overdraft debt is expensive — even if the structure is clearer than before.
Overdraft Rates by Major UK Bank
| Bank |
Representative APR |
Fee-Free Buffer |
Max Arranged Limit |
| First Direct |
39.9% |
£250 interest-free |
Up to £3,000+ |
| HSBC (Advance) |
39.9% |
None (standard) / £25 (Advance) |
Subject to credit |
| Barclays |
35.0% |
None |
Subject to credit |
| Lloyds |
39.9% |
None |
Subject to credit |
| NatWest |
39.49% |
None |
Subject to credit |
| Nationwide FlexDirect |
39.9% |
None |
Subject to credit |
| Monzo |
19.0%–39.0% |
None |
Up to £3,000 |
| Starling |
15.0%–35.0% |
None |
Up to £5,000 |
Representative APRs are subject to change. The rate offered to an individual customer may differ from the representative APR based on their credit profile. Always check the current rate on the bank's website before applying.
Best Overdraft Account: First Direct's £250 Buffer
First Direct (a division of HSBC) stands out from most UK banks by offering a £250 interest-free overdraft buffer on its 1st Account. This means the first £250 of your arranged overdraft is free — you pay no interest on that portion, regardless of how long it remains outstanding. Above £250, the standard 39.9% APR applies. For customers who regularly dip into overdraft by a small amount near the end of the month, this buffer can save significant money compared with a bank that charges the full APR from the first penny.
Overdraft Cost Calculator: What You Actually Pay
At 39.9% APR, borrowing £500 in an overdraft for 30 days costs approximately:
- ▸£500 × 39.9% ÷ 365 × 30 = approximately £16.40 in interest for one month.
That same £500 overdraft at Starling's lower end (15% APR) would cost approximately £6.16 for the same period — a significant difference for frequent overdraft users. Over a year at £500 constant overdraft, the difference between 15% and 39.9% APR is approximately £124.
Overdraft Alternatives to Consider
| Alternative |
Typical APR |
Best For |
| Personal loan |
5–15% (subject to credit) |
Borrowing £1,000+ over 1–5 years |
| 0% credit card |
0% for introductory period |
Planned purchases; balance transfers |
| Credit union loan |
Capped at 42.6% APR |
Members with limited credit history |
| Arranged overdraft |
15–39.9% |
Short-term shortfalls, same-day access |
How to Apply for an Overdraft
- ▸Log in to your bank's app or online banking and navigate to your account settings or "Borrow" section.
- ▸Request an overdraft limit or an increase to your existing limit.
- ▸The bank conducts a credit assessment — this may be a soft search (no visible impact on your credit file) or a hard search depending on the amount requested.
- ▸If approved, the overdraft is available immediately on your account. If declined, the bank should tell you the reason (where it can lawfully do so).
Case Scenario 1: Payroll Shortfall in a Small Business
Scenario: A sole trader's personal account dips £800 below zero for five days at the end of the month before a client payment clears. She has a £1,500 arranged overdraft at 39.9% APR. The interest cost for five days at £800 overdrawn: £800 × 39.9% ÷ 365 × 5 = approximately £4.38. She acknowledges this is expensive on an annualised basis but accepts it as the price of the short-term flexibility. She sets a reminder to chase the client invoice earlier next month to reduce the overdraft duration.
Case Scenario 2: Using First Direct's £250 Buffer
Scenario: A First Direct customer regularly goes £100–£150 overdrawn for a week before payday. At 39.9% APR, £150 for seven days costs approximately £1.15 in interest — but with the £250 interest-free buffer, this cost is zero. Over 12 months of monthly shortfalls at £150 for one week, the buffer saves approximately £13.80 compared with a bank charging the full APR from penny one. Small saving, but real — and for customers who go deeper into overdraft in certain months, the buffer's protection grows proportionally.
Related reading: UK Bank Fees, Overdrafts and Limits 2026 | UK Bank Overdraft Fees 2026 | UK Cash Withdrawal Limits 2026
Disclaimer
This article is for informational purposes only and does not constitute financial advice. Overdraft rates and features change frequently. Always verify current rates and terms with your bank. Overdraft access is subject to credit approval.
Frequently Asked Questions
What is the cheapest overdraft in the UK?
Based on standard APRs, Starling Bank offers some of the lower overdraft rates among major UK banks — from 15% APR for eligible customers. First Direct's £250 interest-free buffer makes it cost-free for customers who stay within that amount. Rates vary by individual credit assessment, so you may not receive the headline rate.
Does applying for an overdraft affect my credit score?
It depends on the bank and amount. Some banks use a soft search for small overdraft increases (no visible impact on your credit file). A hard credit search is typically required for larger facilities and will appear on your credit file. Using your arranged overdraft responsibly — staying within the limit and repaying promptly — does not damage your credit score.
What is the difference between an arranged and unarranged overdraft?
An arranged overdraft is pre-agreed with your bank up to a set limit. An unarranged overdraft occurs when you spend beyond your arranged limit — or beyond zero if you have no arranged limit. Since the FCA's 2020 reforms, banks must charge the same APR for both types, eliminating the previously punitive fees for unarranged overdrafts.
Is an overdraft better than a credit card?
A 0% credit card is cheaper than an overdraft for purchases if you can repay within the interest-free period. For unexpected shortfalls where speed of access matters, an overdraft is available immediately. For longer-term borrowing, a personal loan at a lower APR is typically more cost-effective than either.
Do digital banks offer overdrafts?
Yes. Monzo and Starling both offer arranged overdrafts to eligible customers, with competitive rates compared with high-street banks. Chase UK does not offer an overdraft facility as of 2026.
Can I reduce my overdraft limit?
Yes. You can request a reduction in your arranged overdraft limit at any time via your bank's app, online banking, or by calling the number on the back of your card. Reducing the limit does not improve your credit score directly but may help with financial discipline if you are trying to reduce overdraft dependency.
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