Dom Tighe.
In recent years there has been a notable move to lenders charging a daily or monthly fee on overdrafts. Although not technically an interest rate, they are nonetheless a cost of borrowing. And in some cases, may have replaced interest charges entirely. So are customers charged more than the interest-charging overdraft rate alone suggests?
With the new effective rates data being collected it is possible to see just what the impact of these fees is on the total cost that borrowers have to pay.
The ‘effective rate on overdrafts including fees’ is calculated by adding the overdraft interest flow to the flow of daily or monthly overdraft fees , dividing by the average daily balance over the month. This rate is then annualised.
- When fees are included, the effective rate as experienced by overdraft borrowers is 26% as at March 2017. This is more than double the rate on interest rate charging overdrafts alone.
- And the share of this cost is rising, in March 2017, fees represent 69% of ‘interest+fee’ flows on overdrafts, up from 59% in January 2016.
Overdraft pricing: Interest charging, and interest and fee charging
Dom Tighe works in the Bank’s Data and Statistics Division.
If you want to get in touch, please email us at bankunderground@bankofengland.co.uk or leave a comment below.
Comments will only appear once approved by a moderator, and are only published where a full name is supplied.
Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.
Of course an element of the fee is or can be an interest rate substitute especially when associated with a fixed term loan or is a regular fee. The same ins true of mortgage discount offers……which I hope the bank takes account of but somehow doubt it as it is often behind the curve .
Daily fees very expensive for small overdraft balances – being charged £1 for £250 overdraft for one day is equivalent of interest rate of 146%