Debt

Overdrafts: the most expensive money you never applied for

There was no form. No rate table, no comparison, no moment where you weighed it up and decided. It arrived with the bank account, wearing the reassuring word "arranged", and it is priced above almost every credit card in the country. This is the one loan nearly everybody has and almost nobody has ever looked at.

The short answer

An overdraft is a loan bolted to your current account. At the big high street banks it costs about 39.5% to 40% a year, which is more than the average UK credit card. It charges nothing until you drop below zero, and it never sends you a bill, because it takes its interest straight out of the account it is charging you on. Research in March 2025 put 9.7 million UK adults, close to one in five, in their overdraft by an average of £709. At 39.9% that is about £283 a year to stand exactly where you were.

The one credit product nobody chooses

Think about how you got every other loan. A car loan, a phone contract, a credit card: each one had a moment. An application, a rate on a screen, a second where you knew you were borrowing.

The overdraft has no moment. You opened a current account at sixteen or eighteen, and somewhere in the paperwork was a facility priced at whatever that bank charges. You did not pick the price. You picked the bank, probably because of a branch near your school or a free railcard.

So here is the price, from the banks' own pages, checked today. HSBC: 39.9% EAR, with the first £25 free. NatWest: 39.49% EAR on the standard account. First Direct: 39.9% EAR above a £250 buffer.

Now hold that against the average UK credit card, which our crazy APRs page puts at about 36.8%. The product with the friendly name, the one that feels like a cushion rather than a debt, is the dearer of the two.

EAR stands for Effective Annual Rate. It is the overdraft's version of APR and it already includes the compounding, so a balance sitting there for a whole year costs you that percentage of it. No translation needed.

How the number got to 39.9%

It used to be worse, and the way it got better explains the number you are looking at now.

Before April 2020, overdrafts were priced with a pile of separate charges: daily fees, monthly fees, a fee for having the facility at all, and much higher charges if you went below zero without permission. Fees like that stack in a way an interest rate cannot, and the people paying the most of them were, without exception, the people who could least afford them.

Then the rules changed. Every overdraft had to be priced as a single annual interest rate. No daily fees. No monthly fees. No charge for simply having the facility. And going below zero without permission could never cost more than doing it with permission.

That was a real win for the people being hammered hardest, and it should be said plainly. Here is the other half of it. Once the fees were gone and everything had to be one clean number, the big banks did not undercut each other. They landed within half a percentage point of one another at about 40%, which is where the whole market can see them sitting, and where they have stayed.

MoneyHelper, the government backed money guidance service, sums up the result in one line: overdraft rates now "range from 19% to 40% or more". That gap is the whole story of this page.

The reform was designed to make prices comparable so that people would compare them. Six years on, ask the question this site always asks: how many people do you know who have moved bank because of an overdraft rate?

The free student overdraft has a timer on it

Student accounts really do give you 0%, and the limits are large: up to £3,250 by year three at the biggest, though the amount you actually get depends on the bank's checks.

Then you graduate, and the account turns into a graduate account, which is still 0% but with a limit that shrinks every year. Then the graduate period ends and you are on an ordinary account with a £25 buffer and a 39.9% rate.

Nothing about that is hidden. It is all published, years in advance. It just happens slowly enough that nobody notices the machine running.

Limits and rate from HSBC's own published pages, checked 26 August 2026: graduate 0% on the first £3,000 then £2,000, ordinary account 0% on the first £25 then 39.9% EAR. £500 at 39.9% is £199.50. £2,475 at 39.9% is £987.53.

Living in it

The loud version of overdraft trouble is a bounced payment and a panic. The quiet version is far more common and much harder to see, because nothing ever goes wrong.

Your balance simply never gets back above zero. Wages land, the red gets shallower for a week, then it deepens again, and the number at the top of the app is always negative. It stops feeling like a debt and starts feeling like where your account lives.

That is 9.7 million people, about £5 billion, at an average of £709 each. And £709 at 39.9% costs about £283 a year. Ask what that £283 bought. Not a car, not a course, not a deposit. It bought the right to be exactly where you already were, for another twelve months.

The same overdraft, half the price

Here is the part that ought to be better known. The high street is not the whole market.

On rates published in June 2026: Cumberland Building Society 14.99%. Starling 15%, 25% or 35% depending on its check. Monzo 19%, 29% or 39%. Virgin Money M Plus 19.9%.

Put £500 in the red for a year and the difference is not subtle. About £200 at 39.9%. About £75 at 14.99%. Same £500, same year, same amount of use. The only difference is which logo is on the app.

People switch bank for a £175 bribe and never once check the rate on the borrowing they actually use. That is not stupidity. It is what happens when a product is designed to feel like a feature rather than a loan.

Trap ahead: it charges the account it is charging you for

Every other lender sends you something. A statement, an email, a minimum payment with a date on it. There is a moment where a human looks at a number and decides. An overdraft has none of that: the interest is taken out of the account that is already below zero, which puts it further below zero, which makes next month's interest slightly bigger. It is the only borrowing you have where paying the interest requires borrowing more. Nothing arrives, nothing asks, and it deepens quietly for years.

The moves

Screenshot this bit

Find the actual number today. Open your banking app, find the account terms, search for "EAR". Most people have never seen their own rate. Ten seconds ends that.
Check your free buffer. Some accounts give you £25 at 0%, some £250, some £500. It is free money if you know about it and invisible if you do not.
Move the limit down, not just the balance. Most banks let you lower your own overdraft limit in the app. Cutting it by a fixed amount each month is a wall that keeps working on the days willpower does not.
Treat three months below zero as a signal. If your balance has not been positive since spring, that is not a buffer, it is a loan you are paying rent on with no end date. Name it and it becomes solvable.
Compare it like any other loan. A building society or app bank overdraft can cost a third of a high street one. It is the cheapest hour of admin available to most people.
Students: put the step down dates in your calendar now. Your 0% limit falls on a published schedule. You can read the whole thing today, years before it costs you anything.
If you cannot get out, say so early. StepChange, National Debtline and Citizens Advice are free charities, not lenders. Lenders also have to treat people in difficulty fairly, which includes freezing things while you get help.

Check it yourself

HSBC's own rates. hsbc.co.uk: overdrafts: "0% EAR (variable) on the first £25, 39.9% EAR (variable) thereafter" on the standard account, and a graduate ladder of £3,000 then £2,000 at 0%. Checked 26 August 2026.
NatWest's own rate. natwest.com: overdrafts: 39.49% EAR variable on the standard account. Checked 26 August 2026.
The cheaper end of the market. Which?: best bank accounts for overdrafts, updated 8 June 2026: Cumberland 14.99%, Starling 15% to 35%, Monzo 19% to 39%, Virgin Money M Plus 19.9%.
What changed in 2020. MoneyHelper: what the changes to overdraft fees mean for you: from April 2020 interest on all overdrafts is charged at a single annual rate, banks can no longer charge separate fees for going below zero without permission, and it can never cost more than an arranged one. Rates now "range from 19% to 40% or more".
How many people are in one. Credit Connect, 5 March 2025, reporting TotallyMoney research: 9.7 million UK adults overdrawn, average £709, about £5 billion in total.
Student overdraft limits. MoneySavingExpert: student bank accounts: up to £3,250 at 0% by year three, subject to the bank's checks.
The comparison. Our page on crazy APRs works out what one month of £100 costs on a card, an overdraft and a payday loan, with the arithmetic shown.

Questions people ask

How much does a £500 overdraft cost per year?

At the 39.9% EAR charged by several big UK banks, £500 held in your overdraft for a whole year costs about £200. At an app bank or building society charging around 15%, the same £500 costs about £75. EAR already includes compounding, so the sum really is that simple: the balance multiplied by the rate.

Is an overdraft worse than a credit card?

On rate, usually yes at the big banks. An arranged overdraft at about 39.9% sits above the roughly 36.8% average UK credit card. A credit card also gives you an interest free window if you clear it in full each month, and purchase protection on things costing £100 or more, which an overdraft does not. The overdraft's only real advantages are that it is already there and that it costs nothing on the days you stay above zero.

Does using an overdraft affect my credit score?

Using one normally is fine. Being permanently near your limit is not: lenders read a constantly maxed overdraft as strain, in the same way as a maxed credit card. Going over the limit or having payments refused is worse again, because that gets recorded. Dipping in and coming back out each month barely registers.

Why are most UK overdrafts 39.9%?

Because of what happened when the pricing rules changed in April 2020. Daily and monthly fees were banned and every overdraft had to be a single annual interest rate, with going below zero unarranged never costing more than arranged. That ended some brutal charging, and it also removed the thing the banks had been competing on. The big names then settled within half a percentage point of each other at about 40%, while app banks and building societies price a good deal lower. MoneyHelper puts the current spread at 19% to 40% or more.

What happens to my student overdraft when I graduate?

It normally becomes a graduate overdraft, which is still 0% but with a limit that falls each year, commonly £3,000 in the first year and £2,000 in the second. Anything you owe above that year's limit starts being charged at the ordinary rate. When the graduate period ends the whole balance is charged. The schedule is published years in advance and nobody writes to remind you, so put the dates in your calendar while it is still free.

Can I reduce my overdraft limit myself?

Usually yes, in the app or by asking, and it is one of the few money moves that works without willpower. Lowering the limit in steps as you clear the balance stops the space you just freed up being used again. Do not cut it below what you currently owe, and if you are using the whole thing every month, get free advice before you shrink the room you are relying on.