Overdraft costs near 40% APR: cheaper ways to cover the gap

An overdraft feels like part of your bank account rather than a loan, which is exactly why it is expensive. Many high street banks charge close to 40% APR on arranged overdrafts, more than most credit cards. This guide explains how overdrafts are charged, the difference between arranged and unarranged, and the routes to a cheaper option. Information only, not personal advice.

How overdrafts are charged

Since 2020 banks have had to charge a single interest rate on overdrafts rather than daily fees, which made the true cost visible. The result was rates clustering around 35% to 40% APR at most big banks. Interest is calculated daily on the amount you are overdrawn and charged monthly. Being £1,000 overdrawn all month at 39.9% APR costs roughly £28 to £30 in interest, every month, for as long as it lasts.

Some accounts have a small interest-free buffer, often £25 to £250, and some student and graduate accounts have larger 0% overdrafts for a fixed period. Check what your own account offers.

Arranged versus unarranged

An arranged overdraft is a limit your bank has agreed in advance. Interest applies but payments go through.

An unarranged overdraft is when you go past your agreed limit or into the red with no limit at all. The bank can refuse the payment, charge a fee for doing so, and may charge the same or a higher rate on the amount. Repeated unarranged use also gets noted on your file and can affect future borrowing. If you are close to the line, it is nearly always better to ask for a small arranged limit than to risk going over.

Option 1: 0% money transfer credit card

A money transfer card pays cash from the card into your current account, clearing the overdraft. You then owe the card company at 0% for a set period, usually for a one-off fee of a few percent of the amount. It only works if you set up a repayment plan to clear the card before the 0% ends and stop using the overdraft. Use an eligibility checker (soft search) before applying, and check a comparison site for current deals.

Option 2: switch to a cheaper account

A few current accounts charge lower overdraft rates or offer a 0% overdraft for a period after switching. The Current Account Switch Service moves your direct debits and standing orders in seven working days with a guarantee, and some banks are currently paying switching bonuses. Whether a new bank will match your existing overdraft limit depends on its own credit check, so ask before you switch rather than after.

Option 3: talk to your bank

Banks have rules about customers who are in persistent overdraft, meaning overdrawn most of the time. They must contact you and offer help. That help can include a structured repayment plan, a temporary interest freeze, or converting the overdraft to a fixed-term loan at a lower rate with set monthly payments. Ringing the bank and saying you want to reduce your reliance on the overdraft costs nothing and often produces a better deal than the default rate.

Option 4: reduce the limit as you go

Once you start paying it down, ask the bank to lower your arranged limit in steps. It stops the balance drifting back up and reduces the amount you could be charged on in a bad month.

Watch out for

• Payday and short-term loans. They are not a cheaper alternative and usually cost far more over the year.
• Cancelling the overdraft before the money transfer has landed. Wait until the funds clear.
• Spending on the money transfer card. Purchases are usually charged at the standard rate from day one.
• Treating the overdraft as income. If you are overdrawn every month, the underlying issue is a budget gap, and free debt advice from StepChange or National Debtline can help with that.