UK Bank Overdraft Rules and Costs Explained

UK overdraft pricing changed materially in April 2020 when the FCA banned the previous mix of daily charges, monthly fees and interest, requiring a single APR for transparency. The change was intended to address persistent harm in the overdraft market, where customers using overdrafts persistently were paying more than payday loan rates without the corresponding regulatory oversight.

This guide covers the current rules, the typical pricing, the consumer protections under CONC 5C, and the practical points around using overdrafts responsibly or moving to lower-cost credit alternatives.

How overdraft pricing works post-April 2020

Since 6 April 2020 banks must charge a single APR on arranged overdraft borrowing, with no separate daily or monthly fees. The APR must be the same whether the overdraft is arranged or unarranged. Typical rates run 35% to 49.9% EAR variable across high-street banks; some fintech and challenger banks offer rates as low as 19% to 29% EAR.

Interest accrues daily on the overdraft balance and is typically charged to the account monthly. A GBP 500 overdraft used for an average of 20 days a month at 39.9% EAR costs approximately GBP 11 a month (GBP 500 x 39.9% x 20 / 365). The same GBP 500 overdraft used continuously costs approximately GBP 17 a month.

Refused payment fees (where a direct debit or standing order tries to exit an account without sufficient funds and the bank refuses it) are capped by the FCA under CONC 5C. Most banks now charge GBP 0 to GBP 15 for refused payments, with the cap and policy varying by bank.

Worked example: a customer slips into an unarranged overdraft of GBP 200 for 5 days. At 39.9% EAR the interest is GBP 200 x 39.9% x 5 / 365 = GBP 1.09. Pre-2020 the same situation might have attracted a GBP 6 unarranged-use fee plus GBP 5 a day daily charge totalling GBP 31. The 2020 rules removed the disproportionate cost of small short-term unauthorised use.

Arranged versus unarranged overdraft

An arranged overdraft is a pre-agreed credit limit on the current account, set after the bank's affordability assessment under CONC 5C. The customer can use the overdraft up to the limit without further authorisation, paying interest only on the daily balance used.

An unarranged overdraft (sometimes called unauthorised) is borrowing beyond the arranged limit, or borrowing where no overdraft has been arranged at all. The bank's discretion to honour the underlying transaction (allowing the customer to go overdrawn) is exercised case by case, with no obligation to lend. From April 2020 the interest rate on unarranged overdrafts must be the same as the arranged rate.

Banks may decline to honour an unarranged transaction, in which case the direct debit or card payment is refused and a refused payment fee may apply. The customer's obligation to the third party (the direct-debit originator) remains; the bank's refusal does not satisfy the underlying debt.

Practical action: arranging a small overdraft limit even if rarely used provides cushion against accidental overdrawing. A GBP 200 arranged limit at 39.9% EAR costs nothing while unused, and converts an unarranged-use incident into an arranged-use incident with no penalty differential since 2020.

CONC 5C and repeat-use interventions

FCA CONC 5C requires firms to monitor overdraft use and intervene where a customer shows signs of financial distress. Repeat-use is defined as a customer in arranged or unarranged overdraft for at least 30 days in two consecutive months. The firm must contact the customer, explain the cost, suggest alternatives, and review ongoing use after 3 to 6 months.

Intervention options include: encouraging the customer to make a structured repayment plan, suggesting a personal loan as a cheaper alternative for persistent borrowing, reducing the overdraft limit to encourage debt reduction, and referring to free debt advice (StepChange, National Debtline, Citizens Advice). The CONC 8 requirement to refer customers in difficulty to free advice applies.

Worked example: a customer in arranged overdraft averaging GBP 700 for 8 months out of 12. The bank's CONC 5C system triggers an intervention letter explaining that GBP 700 at 39.9% EAR costs GBP 279 a year, and suggesting a personal loan at 15% APR over 18 months would cost GBP 80 in interest. The customer takes the loan, pays off the overdraft, and saves GBP 199 a year in interest.

Edge case: customers in persistent overdraft who do not engage with the intervention may see their overdraft facility removed (with notice) or reduced. The action is a CONC 5C 'pricing decision' rather than enforcement; the customer's existing balance becomes repayable on the agreed schedule but no new overdraft borrowing is available.

Interest-free buffers and special overdrafts

Some current accounts include a small interest-free buffer (typically GBP 5 to GBP 50) before overdraft charges start. The buffer is intended to absorb small timing differences in payments and credits without triggering interest on what would otherwise be a brief overdraft.

Specialist accounts targeted at students, graduates, or young professionals often include larger interest-free overdraft limits as a customer-acquisition feature. Student account interest-free overdrafts typically scale with year of study from GBP 500 to GBP 2,000+ over the four-year degree, reverting to a standard interest-bearing facility on graduation.

Graduate accounts transition the student overdraft to an interest-free or low-rate facility, gradually reducing the interest-free limit over the three to four years after graduation. The intent is to give graduates time to clear the overdraft without paying full APR.

Practical action: checking the buffer and any interest-free limit on a current account before assuming the headline APR applies to the first pound of overdraft saves money. Some accounts that look expensive on APR have features that make them cheaper in practice for specific use patterns.

Alternatives to overdrafts for persistent use

For persistent overdraft use, a personal loan is typically cheaper. A GBP 2,000 personal loan at 12% APR over 24 months costs around GBP 260 in total interest, compared with the same GBP 2,000 sitting in overdraft at 39.9% EAR for 24 months costing around GBP 1,600.

A 0% balance transfer credit card offers another alternative for credit-card-paid balances but works less well for overdrafts because most cards do not allow transfer to a bank account. The 'money transfer' product from some credit-card issuers does allow this but typically carries a 3% to 5% transfer fee plus a 0% promotional rate for 6 to 12 months.

Credit unions offer regulated loans typically below credit-card and personal-loan rates. Credit union loans are capped at 42.6% APR (3% per month) but most credit unions price well below that, in the 8% to 26% APR range. Membership is geography or employer-based.

Edge case: where the underlying issue is unaffordable spending rather than a one-off cash flow gap, free debt advice from StepChange, National Debtline, or Citizens Advice is the right starting point. Refinancing an overdraft into a loan does not address spending issues and risks adding loan debt on top of returned overdraft use.

Frequently asked questions

How is overdraft interest calculated?

Daily on the overdrawn balance at the headline APR, charged to the account monthly. A GBP 500 overdraft used continuously at 39.9% EAR costs approximately GBP 17 a month (GBP 500 x 39.9% / 365 x 30 days). Since April 2020 banks must charge a single APR with no separate daily or monthly fees, and the unarranged rate must be the same as the arranged rate. The headline rate is variable and can change with notice.

What's the difference between arranged and unarranged overdraft?

An arranged overdraft is a pre-agreed limit after the bank's affordability assessment, used at the agreed APR. An unarranged overdraft is borrowing beyond the limit (or without any arrangement) at the bank's discretion. Since April 2020 both have the same headline interest rate. The difference is in availability: the bank may decline to honour an unarranged transaction, refusing the direct debit or card payment, with a refused payment fee under CONC 5C limits.

How much does the average UK overdraft cost?

Typical EAR is 35% to 49.9% on high-street current accounts; some fintech banks offer 19% to 29%. A GBP 500 overdraft averaging 20 days a month at 39.9% costs about GBP 11 a month, GBP 132 a year. A GBP 2,000 overdraft used continuously at the same rate costs about GBP 800 a year. Persistent overdraft users typically pay more in annual interest than a personal loan at 12% APR would cost over the same balance and term.

Will the bank charge me for going overdrawn?

Only at the agreed APR, no fixed fees, under FCA rules from April 2020. Refused payment fees (where the bank declines a transaction for insufficient funds) are capped under CONC 5C and typically GBP 0 to GBP 15. Many current accounts include an interest-free buffer (GBP 5 to GBP 50) before interest starts. Student and graduate accounts offer larger interest-free limits transitioning over the years after graduation.

What's the FCA repeat-use rule?

Under CONC 5C, firms must monitor overdraft use and intervene where customers show signs of financial distress, defined as arranged or unarranged overdraft for at least 30 days in two consecutive months. The intervention includes contacting the customer, explaining the cost, suggesting cheaper alternatives, referring to free debt advice (StepChange, National Debtline) under CONC 8, and reviewing use after 3 to 6 months. Persistent unaddressed use can lead to facility reduction or removal.