How your overdraft is over 1,000 times the cost of a mortgage
AT the heart of the culture of any financial organisation should be the word trust. Yet year on year, those financial organisations who know the right thing to do, just don't do it, and you pay through the nose for it.
I'm sure you've seen the recent news regarding overdraft fees, which is another startling example of banks preying on the needy. We don't need food after a banquet. Similarly when we are hungry we don't wish to be deprived of a meal, or charged over a thousand times as much as we should be.
Consumer champion Which? showed that banks are charging more for overdrafts than the outrageous payday loans. Santander was the worst offender with £179 interest over a 30-day period on a £100 unarranged overdraft.
That 179 per cent for one month's lending is quite different than the 0.145 per cent charged by the average mortgage lender; in fact it's 1,234 times as much. Put another way, you will pay as much interest on an unauthorised £100 overdraft as you would pay on a £123,400 mortgage!
Santander weren't alone and many of the main banks are equally as guilty. TSB, HSBC, First Direct, Royal Bank of Scotland and NatWest were all found to be charging more than six times the extortionate payday loans.
While the regulator will complete a review on the overall costs of overdrafts this year, and look to introduce measures to deal with them, how much wasted interest will disappear from your bank accounts before this comes into effect?
Santander have announced they will be altering their charges (not before time). Last year Lloyds announced they would be ‘streamlining' their charges. In November they announced that customers would pay 1p per day for every £7 in overdraft.
Those words may mean little to the people finding themselves stuck in this hole. This daily interest compounds and can equate to 52 per cent per year. Streamlined? Remember, a mortgage is only 1.74 per cent per year. If you go online, each bank has an overdraft calculator so you will be able to see what you are truly paying.
My concern with the ‘tap and go' culture is that many will fall into this black hole of cheap quick credit. Debt charity Stepchange said that overdrafts were the second most common debt they dealt with. Amazingly, one in four of us went overdrawn last year and 2.1 million people were overdrawn all year. That is an extortionate cost of credit and a huge waste of money.
The issue of overdrafts is often down to simple budgeting as is the use of credit cards. I have seen countless scenarios of late were credit card companies are charging over 30 per cent and banks are trashing the consumer at the other end with bank charges as above.
The numbers are part of the answer, but undoubtedly the first stage is to squeeze spending until the finances are under control.
Most businesses go under because of cash-flow, and the same is true of household debt. While some credit cards allow a quick switch to a 0 per cent deal, it's not long before the rate is back to normal.
Consider the above cost of a £123,000 loan compared to a £100 overdraft. Sometimes it's just best to consolidate at the lowest possible rate, breathe, pull the spending in, and then use the interest you are saving to pay the mortgage debt back off again.
Many borrowers say they like to keep the two items separate, believing, incorrectly, that if they default on an overdraft it doesn't affect their house. The accumulating interest, fines and debts are all still payable and if you have an asset they will be able to get their money back one way or another.
Adding insult to injury, the above scenario will have a downward spiralling impact on your credit score, meaning that future credit will, at best, be more expensive, or perhaps not even available at all.
:: Peter McGahan owns independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a question on your debts call Darren McKeever on 028 6863 2692, email firstname.lastname@example.org or visit www.wwfp.net.