MONEY · OVERDRAFTS EXPLAINED
Overdrafts Explained
How arranged and unarranged overdrafts work, what they cost, and safer alternatives.
Quick summary
- An overdraft is borrowing on your current account
- Arranged overdrafts are agreed in advance; unarranged are not
- Overdraft interest is usually charged daily
- Long-term overdraft use can become very costly
- If you’re persistently overdrawn, you may be eligible for support from your bank
For information only
An overdraft lets you spend more money than you have in your current account. It can be useful for short-term cash flow issues, but it is often an expensive way to borrow if used for weeks or months. This guide explains arranged vs unarranged overdrafts, how charges work, what to do if you’re stuck in overdraft, and where to get help. This is general information, not personal financial advice.
What is an overdraft?
An overdraft is a credit facility linked to your current account. It allows your balance to go below £0 up to a limit.
Example:
If you have £50 in your account and spend £80, you are £30 overdrawn.
Arranged vs unarranged overdrafts
Arranged overdraft
This is pre-agreed with your bank. You’ll have:
- A set limit (e.g. £500)
- An interest rate (APR)
- Terms for review and changes
Unarranged overdraft
This happens when you go over your limit or you don’t have an agreed overdraft. It can lead to:
- Higher costs
- Declined payments
- Fees depending on your bank’s terms
- Negative markers if it causes missed payments elsewhere
Many banks have reduced punitive fees compared with older models, but unarranged borrowing can still create problems.
How overdraft charges work
Most overdrafts charge interest daily on the amount you’re overdrawn.
That means:
- A small overdraft used briefly may cost little
- A larger overdraft used continuously can add up quickly
Overdrafts can be more expensive than personal loans, especially for sustained borrowing.
Why overdrafts become a trap
Overdrafts are easy to fall into because:
- Repayments are not structured like a loan
- The debt “floats” and doesn’t reduce unless you actively pay it down
- You can feel “normal” while still borrowing every day
Signs you may be stuck:
- You go overdrawn most months
- Your salary brings you back to £0, then you fall back again
- You use overdraft to pay for essentials
- You avoid checking your balance because it causes stress
Safer alternatives to overdrafts
Depending on your situation, alternatives may include:
- A lower-interest personal loan (structured repayments)
- A 0% purchase credit card (if you can repay before it ends)
- A credit union small loan
- A budget plan to reduce outgoings
- Requesting support from your bank (see below)
Avoid payday loans or high-cost credit where possible.
If you are in persistent overdraft
Banks are expected to support customers who use overdrafts repeatedly.
Practical steps:
- Ask your bank to explain the cost of your overdraft
- Ask about options to reduce interest or set a repayment plan
- If you’re vulnerable or struggling, tell them — it can change what help they can offer
If you cannot reduce the overdraft, free debt advice is available.
Complaints and escalation
If you believe charges are unfair or your bank hasn’t treated you fairly:
- Complain to the bank first
- If unresolved, escalate to the Financial Ombudsman Service (FOS)
Financial Ombudsman Service (FOS)
Website: https://www.financial-ombudsman.org.uk
Phone: 0800 023 4567 or 0300 123 9123
Email: complaint.info@financial-ombudsman.org.uk
Free help if you’re struggling
StepChange Debt Charity
Website: https://www.stepchange.org
Phone: 0800 138 1111
National Debtline
Website: https://www.nationaldebtline.org
Phone: 0808 808 4000
Citizens Advice
Website: https://www.citizensadvice.org.uk
Phone: 0800 144 8848
Key takeaways
- Overdrafts are designed for short-term borrowing, not long-term debt
- Arranged overdrafts are safer than unarranged
- Daily interest can add up quickly if you stay overdrawn
- If you’re persistently overdrawn, ask your bank about support options
- Get free debt advice early if overdraft use is becoming unmanageable
Is an overdraft a loan?
It’s a form of credit, but it works differently from a loan because it has no fixed repayment plan.
Does using an overdraft affect my credit score?
It can. Arranged overdrafts used responsibly may not harm you, but persistent use or unarranged overdrafts can be a negative signal.
Can my bank remove my overdraft?
Yes, banks can change overdraft limits, often with notice. If you rely on it, plan for alternatives.
Should I use a credit card instead?
Not always. Compare costs and ensure you can repay. Some credit options may be cheaper than overdraft borrowing.
What if I can’t repay my overdraft?
Speak to your bank and contact a free debt advice organisation as early as possible.
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