Arranged vs Unarranged Overdrafts

An arranged overdraft is a borrowing limit you agree with your bank in advance. You can spend up to that limit, and the bank charges interest on the amount you actually use. An unarranged overdraft is what happens when you go past that limit, or borrow with no limit agreed at all. The two used to be priced very differently, with unarranged borrowing far more expensive. That changed on 6 April 2020, when rules came in that stopped banks charging more for unarranged overdrafts than for arranged ones¹.

The practical difference today is less about the price and more about control. An arranged limit is agreed, visible in your banking app and something you can ask to change. An unarranged overdraft is not guaranteed: the bank decides payment by payment whether to let the money go out, and it can refuse. If it refuses, the payment fails, and some banks charge a fee for that³.

Interest is the main cost of both. Banks cannot charge a higher interest rate on an unarranged overdraft than on an arranged one, and where there is no arranged overdraft the rate is compared with a similar account². Some banks have gone further and stopped charging interest on unarranged overdrafts altogether, including HSBC and first direct from 19 May 2026⁵.

What an arranged overdraft is and what an unarranged overdraft is

An arranged overdraft is the facility set out in an authorised overdraft agreement: you agree a limit with your bank in advance and can spend up to it¹. The bank charges interest for using the overdraft, and there are no other charges on the arranged side⁵. The limit is a pre-arranged amount you can borrow when there is not enough in the account, and it can be decreased, or increased on application⁸.

An unarranged overdraft is a regulated credit agreement that arises in two situations: your personal current account goes overdrawn with no arranged overdraft in place, or the bank makes funds available beyond your arranged limit². Banks describe it the same way in their own words. NatWest says it is "when you spend more money than you have and you haven't previously arranged an overdraft limit with us, or you have exceeded your existing overdraft limit"⁹. Nationwide describes it as going over your arranged limit, or your balance falling below £0 with no arranged overdraft in place¹⁰.

The older term for this was an unplanned overdraft, and some banks have simply renamed it. TSB's own glossary lists "Unplanned overdraft" as now meaning "Unarranged overdraft"¹¹. MoneyHelper notes that unauthorised overdrafts are also known as unplanned or unarranged, and happen when you spend more than you have without agreeing it in advance, including going over the limit of an authorised overdraft¹.

The distinction matters because of what the bank can do next. An arranged limit is a standing agreement. An unarranged overdraft is decided case by case, and the bank can decline the payment instead³.

Unarranged overdraft interest is capped at the arranged rate

The rule that reshaped this market is simple to state: the rate of interest on an unarranged overdraft must not exceed the rate on the arranged overdraft². Where there is no arranged overdraft, the unarranged rate is measured against the relevant rate identified for a comparable account². The same rules require that any given balance of arranged overdraft is charged either at zero or at the same rate as any other balance on that account, so banks cannot run a cheap tier and an expensive tier on the same account².

The rules came into force on 6 April 2020. From that date banks have not been allowed to charge more for unarranged overdrafts than for arranged ones, and daily or monthly overdraft fees were banned⁵. The Financial Conduct Authority had proposed the change in 2019, saying it would stop banks and building societies charging higher prices for unarranged overdrafts than for arranged ones⁶. The scale of the old gap explains why: banks made 10 times more revenue from unarranged overdrafts than from arranged ones, and in some cases an unarranged overdraft cost more than a payday loan⁵.

Before the rules, pricing was very different. NatWest and Royal Bank of Scotland charged a monthly usage fee for an arranged overdraft, as well as 19.89% EAR⁵. None of that pricing survives in the current rules.

Some banks no longer charge interest on unarranged overdrafts

The cap sets a ceiling, not a floor. Some banks have chosen to charge nothing for unarranged borrowing. HSBC and first direct both stopped charging interest on unarranged overdrafts from 19 May 2026, and both say their terms documents are still being updated to reflect the change, so older paperwork may still mention the previous pricing⁵.

This is not new behaviour. Lloyds, M&S Bank and Starling Bank were already noted as having no additional fees for unarranged overdrafts back in 2019⁷. Starling tells customers that using an unarranged overdraft can negatively affect their credit score, but the bank does not present it as a fee-bearing event¹².

Where a bank does still charge, the shape of the charge is interest on the amount borrowed, not a flat penalty. Ulster Bank, for example, states: "We don't charge fees for using an arranged overdraft, we only charge interest on the amount of overdraft you use"¹³. The same logic applies on the unarranged side under the cap.

One cost that has not disappeared is the refused payment fee. AIB (NI) says an unpaid fee will be charged if it does not allow a payment from your account¹⁴. That is a charge for the payment failing, not for borrowing, and it sits outside the interest cap.

Interest-free arranged overdrafts on student accounts

Student current accounts are the main place where an arranged overdraft costs nothing at all. Student arranged overdrafts are usually interest-free up to a limit¹⁵. Many student bank accounts offer an interest-free arranged overdraft, and it is typically offered on student bank accounts rather than standard ones¹⁶.

The limit is the thing to check, because it is not the same everywhere and it can change. Nationwide describes its student arranged overdraft as an optional way to borrow while studying, and says the account can be opened without applying for one¹⁵. AIB (NI) goes further for its Student+ and Graduate Accounts: "You do not pay fees or interest on your arranged overdraft if you have a Student+ or Graduate Account"¹⁶.

Interest-free does not mean cost-free in every sense. Nationwide warns that an arranged overdraft will be on your credit file, and that increasing the limit frequently can lower your credit score¹⁷. The interest-free period is also tied to the account type, which is why graduate accounts exist as a separate product once the student years end.

Outside student accounts, interest-free amounts are rarer and smaller. Some banks give an agreed amount you pay no interest on, for example the first £50 of your overdraft, but this is not always the case¹⁸. During the coronavirus period the regulator went further for customers in temporary difficulty, saying no interest should be payable on up to £500 of the balance of an arranged overdraft, and that where a limit was £500 or below the entire balance should be interest-free¹⁹.

Can a bank still charge a fee for going into an unarranged overdraft?

It can charge interest, but not a higher rate than it charges on arranged borrowing, and not a daily or monthly fee for being unarranged². The formal definitions matter here. An unarranged overdraft charge is any charge, by way of interest or otherwise, that would not be due but for the customer borrowing using an unarranged overdraft². An arranged overdraft charge covers interest on arranged borrowing, and also any charge made purely for making an arranged overdraft of £10,000 or less available, whether or not the customer borrows².

That second definition is why some accounts historically carried a monthly fee just for having an overdraft facility, separate from any interest. The 2020 rules removed the daily and monthly fee structures that made unarranged borrowing so expensive⁵.

What remains is the refused payment fee. This is charged when the bank declines a payment rather than letting the account go overdrawn, and it is a fee for the failed transaction, not for borrowing¹⁴. It is worth knowing which side of the line your bank puts a charge on, because the interest cap does not reach a refused payment fee.

The Financial Ombudsman Service sees complaints in this area. In one published case study, a customer asked their bank to cancel a continuous payment authority; the bank cancelled the card instead, and the payments continued. The ombudsman's case studies are a reminder that how a bank handles a payment instruction, not just what it charges, is something a customer can complain about²⁰.

What happens to a payment if I have no arranged overdraft and not enough money?

The bank decides, transaction by transaction. Unarranged overdrafts are not guaranteed, and if you are not approved the payment will be rejected²¹. Monzo puts it plainly: if you go over your arranged overdraft limit, or do not have an arranged overdraft, it rejects payments for free and you cannot take cash out²².

Where the bank does allow the payment, the account goes into an unarranged overdraft and interest may apply. Halifax says it may allow an unarranged overdraft if you spend more than is in your account without an arranged overdraft, or go over your arranged limit, and that it may decline the payment instead; interest charges may apply if it does allow it²³. Nationwide defines the same situation as going over your arranged limit or your balance falling below £0 with no arranged overdraft in place¹⁰.

The regulator treats this as a distinct category of customer harm. The FCA's banking conduct rules list "overdrawing without a pre-arranged overdraft or exceeding a pre-arranged overdraft limit" as a lack of funds matter, covering unarranged overdrafts, payments allowed despite a lack of funds, and payments refused because of a lack of funds²⁴. That framing is why banks must alert customers in these situations.

Can my bank reduce or remove my arranged overdraft limit?

Yes, and it does not need to give notice. Your bank can withdraw or reduce your overdraft at any time, without notice⁷. Lloyds states the same position for customers: your bank or building society could change or cancel your overdraft at any time and it may be repayable on demand²⁵.

You can act on your own side too. HSBC says you can ask to reduce or remove your limit at any time, but the new limit cannot be less than what you owe²⁶. Lloyds says you can decrease your arranged overdraft limit and may be able to apply to increase it²⁷. Nationwide's banking app lets customers choose to increase or decrease their arranged overdraft limit²⁸.

The asymmetry is the thing to plan around. Reducing your own limit is straightforward. Increasing it depends on the bank agreeing, and having the limit cut or removed is a decision the bank can take unilaterally. Because an overdraft can be repayable on demand, a limit you are relying on is not a fixed-term loan.

Does using an unarranged overdraft affect my credit score?

It can, and banks say so consistently. Using an unarranged overdraft can have a negative impact on your credit rating, and can make it more difficult to borrow in the future²⁹. Nationwide states simply that unarranged overdrafts can be bad for your credit score¹⁰. first direct says the same for its own customers³¹.

The arranged side is more nuanced. Having an arranged overdraft and managing it well is unlikely to have a major impact on your credit score³². NatWest says an arranged overdraft is unlikely to have a major impact as long as you do not go beyond your limit or have payments refused⁹. Applying for an arranged overdraft does not in itself affect your credit score, but using one increases your total borrowing, which may affect it²³.

What tips an arranged overdraft into a problem is behaviour around it. Not paying it off regularly, having payments declined, or using an unarranged overdraft can all have a negative impact²³. Not paying off the arranged overdraft including interest may also count against you²³. Nationwide adds that increasing your arranged limit frequently can negatively affect your credit score³⁴. first direct notes that an unarranged overdraft lasting more than 30 days could have a negative impact on your credit rating³⁵.

The practical point is that the credit file records borrowing, not just missed payments. An arranged overdraft appears on your credit file as a form of borrowing¹⁷. Staying inside the limit and clearing the balance is what keeps it neutral.

Where to get help with overdraft debt

Overdraft debt is a priority debt in practice, because it sits with your bank and the bank can take money from your account to cover it. StepChange notes that you may be charged a fee if you go into your bank account overdraft, and that if you cannot repay the overdraft there could be further consequences³⁶. The bank's right to take money from your account to settle a debt is a separate mechanism worth understanding before you fall behind.

Free, impartial help exists and does not cost anything. StepChange and National Debtline both publish guidance on overdraft debt and on the options for dealing with it³⁶. National Debtline's guides cover England and Wales, and Scotland separately, because the debt solutions available differ by nation³⁷. In Scotland, the OPFS guide to priority and non-priority debts sets out which debts are treated as urgent³⁹.

If the problem is a charge or a decision you think was wrong, the bank's own complaints process comes first, and then the Financial Ombudsman Service, which publishes case studies showing how it has resolved disputes about payment instructions and account handling²⁰. MoneyHelper's overdraft guidance is a free starting point for understanding what you are being charged and why¹.