According to the latest findings by Which?, consumers are being charged with up to 12 times more on £100 than what the FCA allows payday companies.
The Financial Conduct Authority (FCA) put forward a cap on short-term credit in January 2015 to protect borrowers from excessive interest rates charged by which. However, the new Which? research made some astonishing discovery that unarranged overdrafts, which banks provide to people borrowing for short-term, are way more expensive in comparison for the same amount and timeframe.
This means that for a person who is borrowing from a payday lender £100 for 28 days will have to pay around £22.40. But if the same amount is overdrawn without any agreement from a high street bank, it will cost them about £90. The banks, in their defence, said that overdrafts should be treated as a last resort, as consumers have other less expensive ways to borrow at their disposal.
The chairperson of the Treasury Select Committee, Andrew Tyrie, expressed his concerns about the overwhelming cost of overdrafts earlier this week. He dispatched letters to 13 UK High Street banks to provide a logical explanation about these exorbitant charges for unarranged borrowing.
While addressing to the consumers, Mr. Tyrie said that they need to have clear idea of how much they are being charged for their bank accounts, especially in the case of overdrafts.
Varying Charges of Overdrafts
Different high street banks have set varying overdraft charges that differ widely. The organization took the liberty of comparing the charges applied on borrowing £100 for 28 days by several high street banks.
Royal Bank of Scotland (RBS) was found to be among those that have the highest charges. They provide consumers with a buffer worth of £10, and then charge them with £6 in any 30 day period for up to a maximum of £90.
Halifax charges up to a maximum of £100, capping at £5 a day. Customers having accounts in HSBC, Lloyds, and TSB pay up to £80.
The Competition and Markets Authority (CMA) reported that from such drafts, UK banks made £1.2 billion in 2014. The authority has already suggested putting a limit on charges, which will be called as a Monthly Maximum Charge (MMC). The final recommendations are expected to be published next month.
But according to Which?, most of the banks already have a cap on their overdrafts, so that will not make any difference. Moreover, the accused banks have said that the charges applied on unarranged overdrafts have become quite less as compared to what they used to be.
According some major UK banks, they have always been advising their consumers to go for planned overdrafts whenever possible to pay as minimum charges as possible. For example, HSBC said that if a customer borrows £100 for 28 days through the planned overdraft method, it will only cost them £1.40.
Lloyds’s representative said that it is never a smart financial move to take unarranged overdrafts as they are designed for emergency situations and not for long-term borrowing. Resorting to an unplanned overdraft for overcoming financial challenges for a sustained period has never been a representative of general current account behaviour. He further said that most of their customers stayed within their planned limit while using their overdraft in an average month.
The director of campaigns and policy of Which?, Alex Neil, expressed his concern for customers that people opting for unplanned overdrafts from big high street banks can end up with paying much higher charges as compared to payday loan companies.