01, September 2016: Payday loan firms are regularly berated in the news media for charging more interest than high street banks. Fees, allegedly, run into the thousands, and interest rates are excessive. But the reality is that fees on loans from payday loan companies like Swift Money are typically lower than bank overdraft fees. High street banks like HSBC, Santander and RBS, might charge a lower rate of interest. But they make up the difference with lump sum charges.
On January 1st this year, the maximum amount a customer could be charged for a payday loan was capped. Payday loan companies were not allowed to charge customers more than £22.40 for every £100 they borrowed in a 28 day period. Banks, on the other hand, are still allowed to charge a lot more. Charges for authorized overdrafts are currently running at £30 per month. For unauthorized overdrafts, some banks are charging a daily rate of £90 per month.
When a person takes out a credit card, they are asked to sign a credit agreement. This agreement sets a limit on the amount of money that a person can take out in any given month. If that limit is set at £5,000, that means that £5,000 is the maximum that the individual can spend in any given month before incurring charges. If the person goes over that limit, then they start drawing on their overdraft.
Some credit providers arrange overdraft fees beforehand. For instance, a person might be given an authorised overdraft that allows them to go over their credit limit for a prearranged fee.
But more often than not, overdrafts are not prearranged. It is in this situation where it becomes clear that high street banks are a lot more expensive than payday loan lenders. Santander for instance charges £68 over a 28 day period for an unarranged overdraft. TSB and Lloyds charge £80 and RBS, £90. These figures are more than triple the amount charged by payday loan companies.
Are Bank Overdrafts Similar To Other Financial Products?
Banks often call overdrafts “emergency lending” facilities. These facilities, because of their nature and risk, cost more. They’re used in situations where a person has no other source of finance.
Payday loans are the same. They too are used most often in emergency situations. For instance, car breakdowns and job relocations can mean a sudden loss of cash flow. And so many borrowers choose to solve their financial difficulties by taking out a small loan of up to £1,000. They receive the money in their account in a timely fashion, usually on the same day. And they then have enough money to last them until their next payday, at which point, they pay back the loan.
Plans To Reduce Overdraft Charges
Overdraft charges generated more than £1 billion in revenue for credit card companies in 2015. But now the Competition Market Authority is investigating whether banks should increase transparency and lower their fees.
One measure being considered is customers being sent text messages the moment they go into their overdraft. It is estimated that early trials of this have already saved customers £100 million.
Right now, the CMA is considering introducing a cap on the price of bank overdrafts, and will announce its proposals this August.
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