It has been in the news recently that some high-street banks can be charging up to 180% of the amount borrowed than payday lenders for overdrafts. Back in the summer of 2016, we covered this topic extensively, comparing the authorised and unauthorised overdraft fees of someone of the most popular high-street banks, with leading payday lenders.
What are the charges associated with payday loans?
It is said that there are only 2 things we can be sure of in life – death and taxes. Yet for many consumers, banking fees and ongoing overdraft fees are another everyday constant.
Payday lending is normally associated with emergency situations. But in this article, we look to explore how fees and charges associated with short-term loans stack up against fees levied. Especially by mainstream high-street banks.
Since April 2014, the Financial Conduct Authority (FCA) has had the following regulations in place for the short term loans industry:
- Interest rates capped at 0.8% per day (80p of interest per £100).
- Default fees and late payment fees capped at £15.
- Maximum repayment amount capped at double the original loan value.
Each lender has their own structure of charges, though most tend to closely follow the FCA regulated limits.
How do short-term loans compare to overdraft charges?
If you borrow £100 from your chosen payday lender, the most you would pay for the first day of the loan is an extra 80p.
Most lenders will allow you to repay your loan in full without early repayment fees. You can actually reduce overall interest. Do this by repaying your loan as soon as possible, because the interest is calculated and accrued by the day.
Of course, most consumers are not borrowing for one day only. But borrowing £100 for 30 days will typically result in a total repayment of £124.
The cost of a £100 loan for 30 days
Authorised overdraft charges
TSB charges a monthly overdraft fee of £6 for an authorised overdraft that goes past their fee-free limit. They also charge 1.53% interest.
Their standard current account is the Classic Account, which comes with up to £35 interest and fee-free. This means borrowers would be paying 1.53% interest on the remaining £65, or an extra 99p.
Using an authorised £100 overdraft with a TSB Classic Account costs roughly £6.99 for the month. In total, you would be paying back around £106.99.
Halifax charges £1 per day for a planned overdraft. Using an authorised £100 overdraft with a Halifax current account will cost £30. In total, you would be paying back £130.
With HSBC (depending on your bank account) you could be charged an interest rate of up to 19.9% EAR.
Ignoring slight daily increases, this could result in monthly interest of £1.66.
Using an authorised £100 overdraft with an HSBC account, you could be paying back £101.66 in total.
Barclays charges 75p per day for a planned overdraft. Using an authorised £100 overdraft with a Barclays current account will cost £22.50. In total, you would be paying back £122.50.
Unauthorised overdraft charges
If you make use of an unplanned overdraft by going over your limit by £100, TSB will charge the following:
- A monthly overdraft fee of £6 for an unauthorised overdraft.
- Interest on the full amount (£1.53 on £100).
- Daily fees of £10 (up to a maximum of 8 days per month).
Using an unauthorised £100 overdraft with a TSB Classic Account will cost £87.53. In total, you would be paying back £187.53.
Halifax charges £5 per day for an unplanned overdraft, up to a maximum of £100 per month. In total, you would be paying back £200.
With HSBC, you are charged 19.9% EAR on all overdraft balances. Ignoring slight daily increases, this would result in a monthly interest rate of £1.66.
HSBC also charges a daily unauthorised overdraft fee of £5, up to a total, of £80 per month. Using an unauthorised HSBC overdraft could cost you roughly £81.66. In total you would be paying back £181.66.
Barclays charges 75p per day for an unplanned overdraft. Using an unauthorised £100 overdraft with a Barclays current account would cost £22.50. Barclays also charges £8 for each refused payment (to a maximum of £8 per day, or a total of £35 per month). In total, you could end up paying back up to £157.50.
If you’re struggling to pay your bills and cannot find the money in your budget, using a payday loan for a month would cost you around £124.
If you have an authorised overdraft, you can expect to pay roughly between £101.66 and £130. These figures are calculated using the overdraft charges from standard current accounts. The accounts of four of the UK’s main banks, listed above.
Depending on which bank you hold your account with, making use of your authorised overdraft may be a cheaper option than taking out a payday loan. In some cases, the payday loan provides the best value for money.
If you go into an unauthorised overdraft, you may end up paying between £157.50 and £200, again using the example banks above. In all these cases, a payday loan could be the more affordable choice.
Understanding the difference between EAR and APR
Payday loans come with an APR or Annual Percentage Rate. This is a calculation for the cost of borrowing. It takes into account interest rates and any extra costs and fees, over an example year.
For payday loans, APR is not particularly useful. If you make repayments on time, you won’t pay any extra charges and default fees. If you ignored all extra charges and interest fees, a £100 payday loan would cost you £393.60 over a full year.
The £393.60 repayment figure is ignoring the FCA regulation that ensures you would never pay back more than £200 on an initial £100 loan. It is easy to see how the APR is an unrealistic calculation.
The EAR, or Equivalent Annual Rate, is the rate usually associated with overdrafts. This figure takes into account interest only. Fees and charges associated with the overdraft are not factored in.
The EAR does not include daily fees and charges that aren’t classed as interest rates and may total up to £100 per month.
APR on an overdraft
Whether your overdraft facility is an approved facility or unauthorised, take careful notice of the fees involved.
Banks often talk about fees rather than APR’s as it can be easier to mask the true cost.
If your bank account charges you £5.00 per day for use of an unauthorised overdraft, with a maximum monthly billing of £100 your APR would be £1200%
Yet, the interest for an agreed Payday loan of £100 is capped at £24.00 per month. This offers consumers significant financial benefits when compared to standard banking fees.
It is also worth bearing in mind that overdraft fees of £100 per month can start when you are as little as 1p overdrawn.
Late payment fees
Late payment fees for payday loans are restricted to £15 per month. They are also covered under the cap on the total repayment amount. Something which ensures consumers will never pay back more than double what they borrowed.
If a consumer has a £100 Direct Debit to cover, taking out a loan for a month would cost an extra £24. If the loan were paid back late, the £15 late repayment fee might also apply. Interest would continue to be added at 0.8% per day.
Some lenders, such as Wonga, offer a three-day buffer before late repayment fees come into play. Late repayment fees are only charged once per month.
Bank charges continue to gain daily
Banks may set their own monthly limits on unauthorised overdraft charges. This is to stop them from reaching excessive levels. Halifax, for example, charges £5 per day up to £100 per month, at which point charges stop building up.
Authorised overdraft fees will typically continue to amass until all the debt is paid off. With Halifax, these are £1 per day.
Since overdraft fees are applied monthly, borrowing £100 and not paying it back by the end of the month will lead to a consumer being £130 in debt. More so if the overdraft was authorised. 30 days’ authorised overdraft charges will be added to the £100 overdraft. This may push a consumer £30 into an unauthorised overdraft if their authorised overdraft limit is set at £100.
Once a consumer is using even 1p of an unauthorised overdraft, their daily charges might increase significantly. At this point, it can be hard to repay what’s owed. The debt may keep mounting, leading to a spiral of debt. Consumers can contact financial ombudsmen if they feel the charges they are paying are unfair.
Revolving credit options
Considered as ‘traditional’ payday loans are high-interest, short-term loans. Also, there is an increasing number of short-term revolving credit options.
SafetyNet Credit is one lender that offers something closer to a traditional bank overdraft. You can link SafetyNet Credit to your bank account, for automatic monitoring of your financial situation.
If you’re pushed into an unauthorised overdraft, you’ll be transferred money as a short-term loan to get you back into your overdraft limit. You will then pay interest of 0.8% per day rather than being charged high daily fees for an unauthorised overdraft.
Keeping costs down
In the majority of cases, applications for payday loans in the UK are made manually. You will be able to view fees and charges before you accept the loan. Most lenders provide online calculators that estimate your total repayment amount. As well as the cost of each instalment.
If you are struggling to repay what you owe, you should act quickly to contact the lender. You can also approach debt charities for free loan advice.
Many consumers think of payday loans in the UK as an expensive credit option. Most do not realise unauthorised overdrafts and some authorised overdrafts can actually cost more.
With interest rates capped at 0.8% per day, a £100 loan over 30 days would cost an extra £24. The total amount repayable would be £124.
Going into an authorised overdraft by £100 might cost slightly more. Halifax charges £1 per day for use of a planned overdraft, meaning that the total cost of borrowing would come to £130.
Unauthorised overdraft charges are even higher.
TSB charges up to £80 in daily fees, plus overdraft interest and a monthly overdraft fee of £6.
Halifax may charge up to £100 in unauthorised overdraft fees. Thus bringing the total amount repayable to £200.
Unplanned overdrafts are almost certain to be more expensive than borrowing from a payday lender for the same amount of time.
The Financial Conduct Authority (FCA) closely regulates the payday loan industry. As well as keeping fees and charges low by the day, the FCA ensures that there are maximum limits to the debt. Borrowers will never repay more than double what they owe, with late payment fees kept to a maximum of £15.
To date, bank overdrafts are not subject to similar regulations. It is possible for overdraft fees to continue to be charged month after month, for as long as a consumer is in debt. Charges on an authorised overdraft may also push a consumer into an unauthorised overdraft. As such this further adds to the costs of borrowing the money.
For the average consumer, using an overdraft will be the default borrowing choice. Most would barely give a second thought to going overdrawn but would be wary of applying for a payday loan. Despite this, taking out a payday loan could actually work out significantly more cost-effective.
It can be easier to get into a spiral of debt with ever-growing overdraft fees. More so than it could be with a payday loan. As long as you are careful not to take out a loan to pay off a previous one.
Overdraft charges can gain until you are back in the black. Although payday loans are subject to restrictions and will never rise above double the amount of the original loan.