Overdraft Interest in the UK: Why It's Often the Most Expensive Debt

This guide explains how the UK overdraft system works. It does not constitute financial advice.

Overdrafts are one of the most widely used forms of borrowing in the United Kingdom, yet they are also, for most people, among the most expensive. According to FCA data, approximately 26 million people in the UK used an overdraft in 2019 — out of roughly 52 million current account holders. Despite their prevalence, the true cost of overdraft borrowing is often misunderstood.

In April 2020, the Financial Conduct Authority (FCA) implemented what it described as "the biggest overhaul to the overdraft market for a generation." These reforms fundamentally changed how overdrafts are priced, how charges are disclosed, and how providers must treat customers who use overdrafts repeatedly. Prior to the reforms, the UK banking sector generated approximately £2.4 billion in annual revenue from overdrafts, with around £700 million of that coming from unarranged overdraft fees and charges alone.

This guide explains how the current overdraft system operates, what the rules are, and why overdraft interest remains comparatively high — all based on published regulatory sources and verified data.

Overdrafts in the UK are regulated as a form of consumer credit. Since April 2020, providers must charge for overdrafts using a single, simple annual interest rate — known as an Equivalent Annual Rate (EAR). Many major UK banks charge an EAR of 39.9% on arranged overdrafts, though rates vary by provider and, in some cases, by customer. This rate is notably higher than the rates typically associated with personal loans, which according to published market data were averaging between 8.6% and 11.7% APR for standard amounts in mid-2024. The average [[credit card](/guide/joint-debt-rules-who-is-liable-on-a-joint-loan-or-credit-card)](/guide/how-to-move-credit-card-debt-to-0-percent-without-making-it-worse) purchase APR reached 35.3% by June 2024, still below the 39.9% EAR commonly applied to overdrafts at major banks.

Before the 2020 reforms, the picture was even more stark: some banks were effectively charging the equivalent of over 80% APR on arranged overdrafts when fixed fees were factored in.

The FCA's reforms have produced measurable results. A cumulative total of approximately £1 billion in savings for consumers has been attributed to the changes — comprising over £500 million from the new pricing rules and £486 million from measures addressing repeat overdraft use.

Regulatory framework

The FCA is the primary regulator for overdraft conduct in the UK, operating under the Financial Services and Markets Act 2000 (FSMA 2000). The FCA's Consumer Credit sourcebook (CONC), specifically Chapters 5C and 5D, contains the detailed rules that govern overdraft pricing and repeat use. The Consumer Credit Act 1974 also applies to overdraft agreements, providing consumer rights around information disclosure, cancellation, and complaints. Sections 74A and 74B of that Act specifically address information requirements for current account overdrafts, and Section 61B requires provision of overdraft agreement terms. Additionally, the Payment Services Regulations 2017 govern refused payment fees and require clear pre-contract information for payment accounts.

The single-rate pricing rule

Under FCA rules introduced in April 2020, overdrafts must be priced using a simple, single annual interest rate (EAR), with APR disclosure required in advertising. Fixed daily or monthly fees for overdraft borrowing are prohibited, and facility fees are banned for arranged overdrafts up to £10,000. This replaced a system where a complex mix of daily fees, monthly charges, and interest rates made it extremely difficult for consumers to understand or compare costs.

Arranged vs. unarranged overdrafts

A critical element of the 2020 reforms is the rule that unarranged overdraft charges cannot exceed arranged overdraft charges for the same account. If a provider charges more for unarranged overdraft borrowing than for arranged borrowing on the same account, the excess charges are not permitted under FCA rules and may be subject to refund or remediation. Before these changes, unarranged overdraft charges were often dramatically higher, and the burden fell disproportionately on a small group: FCA data showed that just 1.5% of customers paid more than 50% of all banks' unarranged overdraft fees in 2016.

Risk-based pricing

Providers are permitted to use risk-based pricing, meaning they can charge different interest rates to different customers based on creditworthiness. The rule requires a single rate per account — no tiered pricing within the same account. Some providers have adopted this model: for example, published rates show Monzo offering rates of 19%, 29%, or 39% depending on the customer, and Starling offering 15%, 25%, or 35%. Building a solid savings buffer can help avoid reliance on high-interest overdrafts.

Repeat use obligations

Where a customer's pattern of overdraft use — in terms of frequency and depth — may result in high cumulative charges or indicate financial difficulty, the FCA defines this as "repeat use." Firms are required to develop strategies to identify, monitor, and intervene with affected customers, with the aim of reducing repeat use. The specific thresholds for what constitutes repeat use are determined by individual firms, subject to FCA review.

• Implementation timeline: The FCA's overdraft reforms were introduced in stages. Guidance on refused payment fees took effect on 7 June 2019. The repeat use rules came into force on 18 December 2019. The pricing rules — the centrepiece of the reforms — took effect on 6 April 2020. The FCA had originally proposed a shorter implementation window for the pricing rules, but extended it to approximately ten months following industry feedback about the complexity of the required IT changes.
• The £10,000 facility fee threshold: Facility fees for arranged overdrafts are prohibited up to £10,000. Above that amount, arrangement or maintenance fees are permitted. According to FCA data, this threshold captures approximately 0.1% of all personal current accounts with overdraft facilities.
• Agreement documentation: Under Section 61B of the Consumer Credit Act 1974, firms must provide overdraft agreement documentation to customers before or at the time the agreement is made — or immediately after, if certain pre-contract information has already been provided. Failure to comply with these information requirements can affect enforceability and may require court intervention to enforce the agreement, depending on the circumstances.
• Refused payment fees: Under the Payment Services Regulations 2017, fees charged for refusing a payment (for example, when a direct debit cannot be paid due to insufficient funds) must reasonably correspond to the actual costs of refusing that payment.
• Post-reform evaluation: The FCA published a formal evaluation of its overdraft remedies in April 2023 (Evaluation Paper 23/1), covering the period up to August 2021. That evaluation found cumulative consumer savings of approximately £1 billion. It also estimated ongoing annual savings from repeat use interventions at between £88 million and £105 million. On an individual level, the new pricing rules produced average savings of £17.40 per affected customer in 2021. The FCA noted, however, that this evaluation was based on data predating the cost of living crisis.

"Overdrafts are cheaper than credit cards" This is a widespread misconception. While there are exceptions — some providers offer lower overdraft rates, and some credit card APRs are very high — the standard EAR of 39.9% charged by many major UK banks for arranged overdrafts is higher than the average credit card purchase APR, which according to market data reached a record high of 35.3% by June 2024. Personal loans, meanwhile, were averaging significantly lower rates: between 8.6% and 11.7% APR for standard amounts and terms during the same period. These are representative APRs, and actual rates vary depending on individual circumstances.

"The reforms made overdrafts more expensive" For the vast majority of consumers, the reforms resulted in lower costs. The FCA's evaluation identified £1 billion in cumulative savings. However, the FCA also found that approximately 1.4% of consumers may face higher borrowing costs under the new pricing structures — specifically those who were using overdrafts for large or long-term borrowing. The FCA's analysis suggests this group likely qualifies for the repeat use remedies that require firms to intervene and offer support.

"Unarranged overdrafts cost more than arranged ones" Under the current rules, this is no longer permitted. Unarranged overdraft charges cannot exceed arranged overdraft charges for the same account. Before the reforms, unarranged borrowing was often subject to much higher effective charges, and around £700 million of the £2.4 billion in annual overdraft revenue came from unarranged fees.

"The interest rate shown is what you'll pay" The EAR displayed is the annualised rate of interest. For short-term borrowing, the actual amount of interest charged in a given month will be a fraction of the annual figure. However, because overdrafts are typically variable-rate and repayable on demand, the total cost depends heavily on how long and how deeply the overdraft is used. There is no fixed repayment schedule as there would be with a personal loan.

"All banks charge the same rate" While 39.9% EAR is a common rate among major high street banks — including, according to published information, Nationwide, HSBC, NatWest, RBS, Santander, and TSB — there is meaningful variation across the market. Published rates from some providers are considerably lower: Starling has advertised rates from 15%, and Cumberland Building Society has offered rates from 14.99%. First Direct has published a 0% rate on the first £250 of arranged overdraft, with the standard rate applying above that buffer. Because providers can use risk-based pricing, the rate a given individual is offered may differ from headline figures.

• Private bank exemption: Firms where over 50% of personal current account customers had net assets of at least £250,000 (excluding primary residence) in the previous financial year are exempt from the CONC 5C and 5D pricing and repeat use rules. These firms are exempt from CONC 5C and 5D but remain subject to BCOBS, the FCA's Principles for Businesses, and general consumer protection law, including refused payment fee guidance.
• Foreign currency accounts: Accounts denominated in currencies other than GBP are exempt from certain overdraft disclosure and pricing transparency requirements under the competition remedy rules.
• Basic bank accounts: Basic bank accounts, designated under the Payment Account Regulations 2015, do not offer overdraft facilities. The nine largest personal current account providers are required to offer fee-free basic accounts without overdraft facilities to eligible customers.
• Student and graduate accounts: In most cases, student and graduate accounts offer interest-free overdrafts during study periods and for a period after graduation. Interest-free periods may vary, but typically last between one and three years according to published provider information. The standard EAR applies after any interest-free period ends. Overdraft limits on student accounts often increase year on year during study.
• Interest-free buffer zones: Some banks offer interest-free buffer zones — small amounts of arranged overdraft on which no interest is charged. These vary by provider and account type. According to published information, First Direct offers a buffer of £250, TSB offers £100, and many high street banks offer buffers in the range of £10 to £25.
• Overdrafts are repayable on demand: In most cases, an arranged overdraft can be changed or cancelled by the bank without notice. This is a key structural difference from a fixed-term loan, where the repayment schedule is agreed in advance. This feature means that an overdraft facility a customer is currently relying on may not always remain available.
• Consumers facing higher costs under the new rules: The FCA identified that approximately 1.4% of overdraft users may face higher borrowing costs under the new pricing structure. These are typically consumers who were using overdrafts for large or long-term borrowing — a pattern that, according to the FCA, likely qualifies them for repeat use interventions from their provider.

The shift to a single-rate pricing model has made it substantially easier to understand the headline cost of an overdraft. Before April 2020, the combination of daily fees, monthly charges, and interest meant that the effective cost of borrowing — particularly for unarranged overdrafts — could exceed 80% APR. That complexity is now largely gone.

However, the transparency of a single rate also makes it clearer just how expensive overdraft borrowing remains relative to other forms of consumer credit. At 39.9% EAR, the standard rate at many major banks is higher than both the average credit card APR and the average personal loan APR by a significant margin. Published market data from mid-2024 placed the average credit card purchase APR at 35.3%, and personal loan APRs between 8.6% and 11.7% for standard amounts and terms. This may vary depending on the specific product and the individual's circumstances.

The reforms have had a measurable impact on vulnerable consumers in particular. The FCA estimated that personal current account holders in the most deprived 30% of UK areas saw an aggregate annual reduction in overdraft charges of approximately £101 million — reflecting the disproportionate burden these communities bore under the old pricing structures.

The repeat use measures have introduced an ongoing obligation for providers to identify and engage with customers whose overdraft patterns may indicate difficulty. The FCA has projected ongoing annual savings of between £88 million and £105 million from these interventions, though specific firm-level criteria for identifying repeat use vary and are commercially sensitive.

It is worth noting that the FCA's formal evaluation covered data only up to August 2021, and the regulator itself has acknowledged that the cost of living crisis is likely to have changed patterns of overdraft use since that period.

What is the difference between EAR and APR for overdrafts?

EAR (Equivalent Annual Rate) is the annualised interest rate applied to overdraft balances. APR (Annual Percentage Rate) is the measure required in advertising and, following the 2020 reforms that removed most fixed fees, is typically very close to the EAR for overdrafts. Before the reforms, the APR on some overdrafts could be far higher than the nominal interest rate because fixed fees were factored in.

Can a bank charge more for unarranged borrowing than for arranged borrowing?

No. Under FCA rules (CONC 5C.1.2R), unarranged overdraft charges cannot exceed arranged overdraft charges for the same account. If a provider breaches this rule, the excess charges are unenforceable and customers can reclaim them.

Are all personal current accounts subject to the same overdraft rules?

The pricing and repeat use rules in CONC 5C and 5D apply to personal current accounts with overdraft facilities, with two main exceptions. Private banks meeting specific net-asset thresholds are exempt from these rules, and foreign currency accounts are exempt from certain transparency requirements. Basic bank accounts do not offer overdraft facilities at all. Business overdrafts are subject to different regulatory treatment.

How much have the reforms saved consumers?

The FCA's evaluation, published in April 2023, found cumulative savings of approximately £1 billion. This comprised over £500 million from the April 2020 pricing rules and £486 million from the December 2019 repeat use measures. Average savings per affected customer in 2021 were £17.40. The FCA projected ongoing annual savings from repeat use interventions of between £88 million and £105 million.

Did anyone end up paying more after the reforms?

The FCA estimated that approximately 1.4% of consumers may face higher borrowing costs under the new pricing structures. These are typically individuals who were using overdrafts for large or long-term borrowing. According to the FCA, this group likely qualifies for repeat use remedies.

Can my bank remove my overdraft without notice?

In most cases, banks can change or cancel overdraft facilities without notice, as overdrafts are generally repayable on demand. This is a fundamental structural difference from a fixed-term loan. The specific terms governing any individual overdraft facility are set out in the account's terms and conditions.

Do student accounts have different overdraft rules?

Student and graduate accounts typically offer interest-free overdraft facilities during study and for a period after graduation. According to published guidance, interest-free periods may typically last between one and three years. Once the interest-free period ends, the standard EAR applies. The FCA's pricing and conduct rules apply to these accounts in the same way as other personal current accounts.

What happens if I'm identified as a repeat overdraft user?

Under CONC 5D, providers are required to develop strategies to identify and monitor customers whose pattern of overdraft use may result in high cumulative charges or may indicate financial difficulty. If identified, the firm is required to intervene. The specific criteria for identifying repeat use are set by individual firms and vary — the FCA does not prescribe a single universal threshold.

• Overdrafts in the UK are regulated as consumer credit under FCA rules introduced in stages between June 2019 and April 2020. These reforms require all personal current account providers to price overdrafts using a single, simple annual interest rate (EAR), prohibit daily or monthly fixed fees, and ban facility fees on arranged overdrafts up to £10,000. Unarranged overdraft charges cannot exceed arranged overdraft charges for the same account.
• Many major UK banks charge an EAR of 39.9% on arranged overdrafts, although rates vary across the market and some providers offer substantially lower rates. Risk-based pricing is permitted, meaning different customers may be charged different rates by the same provider. Published market data indicates that this standard overdraft rate is higher than both the average credit card APR and the average personal loan APR.
• The reforms have delivered cumulative savings of approximately £1 billion for consumers, with a particular impact on vulnerable customers and those in deprived areas. However, approximately 1.4% of overdraft users may face higher costs under the new structure. The FCA requires firms to identify and support customers who use overdrafts repeatedly.
• Overdrafts remain structurally different from other forms of borrowing: they are typically repayable on demand, have no fixed repayment schedule, and the facility can in most cases be changed or withdrawn by the provider without notice.

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