The complete guide to overdrafts (not just for students!)

The word ‘over’ is rarely used positively, right? ‘Hungover’, ‘overweight’, ‘overcooked’. And it’s fair to say that overdrafts don’t exactly have the best image, either. However if managed right, overdrafts can be a much-needed lifesaver when things get financially tough.

Unsure of what all the jargon means, or what you’ll likely be charged if you fall foul of the overdraft overlords? Read on!

An overdraft is essentially a loan that is glued to the end of your bank account. When you spend all of your money and reach that awful digit 0, you can carry on spending by going into an overdraft and borrowing the money from your bank. This loan is designed to be short-term. As with most financial products, you’ll need to pay interest on what you borrow and this can really rack up after a while. (note: you won’t pay interest on student account overdrafts).

You go into the bank, you get down on your knees and you beg. But generally, you have to be over 18 and a UK resident to be approved one.

There are two types of overdraft:

Authorised

Unauthorised

An authorised overdraft is one that has been approved by the bank and set up on your account. It’s at the bank’s discretion how big it is. You may get one for £250 or you may get one for £2,000, it all depends on your circumstances and the type of account you have. Thankfully, you will only be charged interest on the overdraft when you use it, which means that it can remain dormant on your account without costing you penny and ready to be used in an emergency - you just need the willpower not to go into it. Overdrafts also have no end date, but they can be removed by the bank if it feels that you no longer meet its lending criteria.

Overdrafts on student accounts don’t have interest charged on them for the whole time you’re a student. When you graduate, interest is applied slowly until you have a standard account, when you’ll be charged interest on the full whack. The no interest when you’re a student sounds great, but many (including myself) end up blasting the overdraft and never quite claw their way back out of it, paying a lot in interest.

You don’t have to have an overdraft, either. I took mine off when I finally, after 10 years of being shackled to it, paid it off.

An unauthorised overdraft then, is where you’ve continued to spend and you’ve gone past £0 on your account without arranging an overdraft with the bank. It’s annoying that the bank lets you carry on spending when you clearly have no money and sadly you will have to pay for the privilege. This also applies to those who do have overdrafts but who go over their limits. The fees for going into an unauthorised overdraft are high. In recent years, the government has come down on banks for exorbitant overdraft charges and so they’ve had to scale them back. Even still, the fees can keep people on low incomes trapped in a cycle.

For an authorised overdraft each bank sets its own rates. You can check this before you agree to getting one. For example, for standard bank accounts HSBC has a representative EAR (equivalent annual rate) of 19.9%. This means that if you’ve got an overdraft of £1,000 and you’ve used the entire thing up, you will pay £15.53 in interest for the month. Obviously, the less you use the less interest you’ll pay.

However, there are some accounts with bells and whistles which offer small interest-free overdrafts. For example, Natwest’s Reward Platinum account costs £18 per month and has all those extra trimmings (travel, mobile insurance etc) but in addition has an interest-free overdraft of £250. Which? has a regularly-updated list of the best bank accounts for authorised overdrafts.

For an unauthorised overdraft, things get a bit sticky. Each bank has its own way of dealing with unauthorised overdraft fees, so make sure you research your account’s if you think you might fall foul. For example, Santander’s Everyday Current Account will charge you £6 each day you’re over your limit, as well as £10 for every transaction made. There is a monthly cap (phew!), but it’s still £95. And this is £95 which will need to be paid back out of your next month’s wage packet. For a Nationwide FlexDirect account holder, charges can also go up to £95 depending on how long you are over the limit and how many transactions you make.

It must be noted that many banks now let you go up to £15 into an unauthorised overdraft without incurring any charges whatsoever, so long as you pay it back promptly. HSBC texts me when I’ve gone into my unauthorised overdraft and advises that if I pay it back by 11pm that day it won’t charge me. However, your bank might be different so it’s important that you check what their specific terms and conditions are.

The FCA (Financial Conduct Authority) says that you are less likely to be stung by unauthorised overdraft charges if you use a mobile banking app and sign up to a text alert service with your bank.

It’s also possible to claim back any unfair charges, especially if you’re in financial hardship. See The Money Advice Service’s guide here.

Overdrafts are a great help for short-term borrowing, but you shouldn’t live out of it. Try to see it like a credit card: an expensive thing to use for too long. Even if you don’t have an overdraft, make sure you sign up to a text alert service with your bank, so that you know exactly when you’ve overspent – it will save you loads in steep charges.

By Natasha Culzac

Thanks to a journalistic career history and a childhood at Sylvia Young Theatre School, Natasha has her fingers in a few professional pies, doing her best impression of a model and actor as well as personal finance writer. Outside of work she compulsively watches BBC period dramas and constantly lies to herself that this year will be the year she learns French, once and for all.