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Home > News and Reports > Are bank overdrafts a viable alternative to payday loans?
Oct 21, 2018
Are bank overdrafts a viable alternative to payday loans?

According to the well-known Which? consumer group, bank overdrafts can be every bit as expensive as payday loans.

With a Halifax authorised overdraft, it costs £30 to borrow only £100 for a 31-day period. With some Santander accounts, consumers can pay £20 for the same amount and terms.

However, according to Which?, receiving a payday loan for the same amount for one month using an established payday loan firm, such as Wonga, would cost a consumer £20 to £37.

Having an unauthorised overdraft of £100 for one month with a Santander Everyday account or Halifax Reward current account can cost a UK consumer a whopping £100 in charges. Leaving many Britons up in arms about the lack of bank regulation and the exorbitant charges they assess.

Which? is leading the way in an attempt to persuade the Financial Conduct Authority to prohibit the excessive charges found throughout the consumer credit market, aiming to make charges more reflective of the actual costs of the lenders. Which? is also calling for a cap on charges.

Richard Lloyd, executive director of Which?, said, “It’s time to clamp down on excessive charges and irresponsible lending, and to make sure borrowers are being treated fairly whatever form of credit they’re using.”

Taking the opposite stance, Anthony Browne, chief executive of the British Banker’s Association, believes that overdraft charges have “significantly” fallen in recent years. Browne said, “The Office of Fair Trading estimates that customers are now up to £1 billion better off due to reductions in these fees.”

According to Browne, the high figures portrayed by Which? are only extreme examples of unauthorised bank overdraft charges, which is not a recommended form of borrowing.

With tougher regulations in place for next year, the payday lending industry has recently come under heavy criticism for encouraging UK customers to roll their debts over and incur extra charges in the process.

A multitude of measures have recently been announced by the Financial Conduct Authority that will attempt to improve the entire consumer credit market, which will include limiting payday loan customers to two rollovers and forcing payday lenders to place “risk warnings” on their advertisements.

Under the FCA’s plans, payday lenders will be required to explain the escalating costs associated with loan rollovers to customers and provide them with free debt advice.

However, Russell Hamblin-Boone, the chief executive of the Consumer Finance Association, said its payday lending members are “committed to transparent communication with no hidden charges.”

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