How overdraft interest and charges work

An overdraft is a way of borrowing money through your current account: the bank lets you spend more than you have in the account, up to a limit, and charges you interest for doing so. Since April 2020, interest on all overdrafts is charged at a single annual interest rate (APR), making it easier to compare charges between banks, and the old fixed daily and monthly fees were banned¹. You only pay interest on the overdraft money you use, not on the whole limit².

Overdrafts are common. Around 21% of all UK adults held an overdraft, now or in the last 12 months, according to the FCA's Financial Lives survey published in May 2024³. But they are an expensive way to borrow: rates from banks and building societies range from 19% to 40% or more¹, and an overdraft is repayable on demand, which means the bank can ask for the whole amount back in one go if it chooses to⁴.

What overdraft interest is and when you pay it

Overdraft interest is the price a bank charges for letting you spend money you do not have in your current account. An overdraft is a type of loan that often has interest, borrowed through your current account¹. If you overdraw from your account, the bank will charge you interest on a daily basis and can ask that the overdraft is cleared on demand⁸.

Interest starts to apply as soon as you go below zero, and it is charged until what you borrow is paid back⁹. There are usually fees or interest if you spend more than you have in your account, including where there is not enough to cover a Direct Debit or standing order¹⁰. Because the charge is a percentage of the amount borrowed, the cost grows with the balance: the more overdrawn you are, and the longer you stay overdrawn, the more interest you pay.

Guidance is clear that overdrafts should only be used for emergencies or as a short-term option¹. You will usually pay expensive daily interest to use one, and it is a form of debt¹¹. For longer-term borrowing, other forms of credit may work out cheaper, and the section on ways to reduce or clear an overdraft below sets out the options.

Overdraft rates: typically 19% to 40% or more

Interest rates from banks and building societies on their overdrafts range from 19% to 40% or more¹. MoneyHelper describes current account overdrafts as charging daily interest up to 40%¹², and credit union bank accounts as normally charging daily interest up to 42.6%¹³. The House of Commons Library notes that after the 2020 changes, nearly every mainstream bank decided to charge an interest rate of approximately 40%⁷.

The rate is expressed as an APR, an annual percentage rate, which is the standard way of showing the yearly cost of borrowing. Because all overdrafts now use this single figure, you can compare the cost of overdrafts between banks directly, in a way that was not possible when some charged daily fees and others charged interest¹.

Two things are worth bearing in mind when you look at the rate. First, the Bank of England groups overdrafts with credit card revolving credit and payday loans as types of borrowing that charge higher interest¹⁴. Second, the rate is not the whole story: the cost also depends on how much you borrow and for how long, which the worked examples below show. A £100 overdraft at a high rate paid back within days costs far less than a £1,000 overdraft at a lower rate left in place for a year.

Interest is worked out daily and charged monthly

Overdraft interest is usually calculated daily and the charge added to your balance monthly⁵. Each day the bank looks at how much you are overdrawn, works out that day's interest, and at the end of the charging period adds the day's amounts together and takes the charge from the account. Because the charge is added to your balance, interest can then be charged on the interest, so a balance left untouched grows slightly faster over time.

The daily calculation is why the balance matters more than the limit. Interest applies only to the amount you are actually overdrawn on each day, so a balance that swings up and down during the month costs less than one that sits at the same level all month². Some banks will not charge interest if you pay your overdraft back on the same day you go into it, though this varies between banks⁵.

What an overdraft costs in pounds: worked examples

The clearest way to see what an overdraft costs is to look at worked examples. StepChange gives the example of £100 of overdraft used for a month at 40% EAR, which means you have paid £2.87 in interest if you pay it off quickly¹⁶. Experian's examples show the annual cost of staying overdrawn at 22% EAR: £100 overdrawn for a full year costs £22 in interest, £500 overdrawn costs £110, and £1,000 overdrawn costs £220⁵.

The same £100 borrowed at 40% EAR rather than 22% would cost £40 over a full year rather than £22, which is why the rate matters as much as the amount⁵. These figures are examples of how the maths works, not a prediction of what any particular account charges: your own rate is shown in your account terms and on your statements.

Debt charities use overdrafts in their examples of how to order debts when paying them off. National Debtline's example debt list includes an overdraft of £400 at 20% with a minimum payment of £0, in both its avalanche method guide (paying the highest rate debts first) and its snowball method guide (paying the smallest debts first)¹⁷. StepChange's guide to arranging payment with creditors gives an example of a £300 overdraft balance where the offer works out at £30¹⁹. The zero minimum payment is the point: unlike a loan or credit card, an overdraft has no fixed monthly repayment, which is convenient but also means the balance can sit there costing interest indefinitely.

Arranged and unarranged overdrafts: how the charges compare

An arranged overdraft is one your bank has agreed in advance: the bank lets you spend more than your balance, sets a limit, and charges you interest for using the overdraft. There are no other charges²⁰. An unarranged overdraft is when you go over your agreed limit, and your bank charges you higher interest and fees if you go into one²¹.

Since April 2020 the rules cap what a bank can charge on an unarranged overdraft. Where a customer has an arranged overdraft on a personal current account bearing interest above zero, the rate of interest on the unarranged overdraft must be computed, structured and presented in an identical manner, although the level of the rate that applies to the unarranged overdraft may be lower²². The rate of interest that applies to the unarranged overdraft must not exceed the rate of interest that applies to the arranged overdraft, or, where there is no arranged overdraft, the relevant rate identified for the comparable account⁶.

The rules define the charges precisely. An unarranged overdraft charge is a charge, by way of interest or otherwise, that a firm is contractually entitled to levy and that would not be due but for the fact that the customer has borrowed, borrowed further or continues to borrow, using an unarranged overdraft²³. An arranged overdraft charge is a charge that a firm is contractually entitled to levy that would not be due but for the customer borrowing using an arranged overdraft, or exclusively for making available an arranged overdraft with a pre-arranged limit of £10,000 or less, whether or not the customer borrows²⁴.

In practice, going over your limit can still cost more than staying within it, because interest applies to the larger amount borrowed, and because of what can follow. nidirect guidance for Northern Ireland notes that with an unarranged overdraft you may have to pay a penalty charge and a high rate of interest, that your bank may also charge for sending a reminder letter and for Direct Debits or cheques put through the account, and that the bank may freeze the account until the overdraft is paid off¹⁵. Which? reported in 2016 that customers using an overdraft every month borrowed 81% of all overdraft lending and paid 69% of all arranged, unarranged and refused payment fees²⁵. The dedicated comparison of arranged vs unarranged overdrafts covers the differences in more detail.

Fixed overdraft fees were banned, leaving a single interest rate

Before April 2020, many banks charged overdrafts through a mix of daily or monthly fees, sometimes alongside interest, and unarranged overdrafts could carry much higher effective costs than arranged ones. The FCA's changes replaced all of that with one structure. Rates must now be calculated as a percentage of the amount borrowed, and fixed fees and charges were banned⁷.

The rule itself states that the charge must be a rate of interest expressed as a percentage applied on an annual basis to the relevant balance of arranged overdraft or unarranged overdraft²². For arranged overdrafts with a limit of £10,000 or less, the definition of an arranged overdraft charge covers a charge made exclusively for making the overdraft available, whether or not the customer borrows²⁴, and independent guidance is that on an arranged overdraft there are no other charges beyond the interest²⁰.

The ban is why comparing overdrafts is now straightforward: one APR per account, applied to the balance. It is also why the old complaints about unarranged overdraft fees costing more than a payday loan no longer arise in the same way, since the unarranged rate cannot exceed the arranged rate⁶. The page on the 2020 overdraft changes and old overdraft fees covers what changed and what happened to the old fee structures.

Interest-free buffers and student overdrafts

Not every pound of overdraft costs interest. A firm is not prevented from providing in the terms and conditions of the overdraft that no interest is payable in respect of arranged or unarranged overdraft balances of up to specified amounts, sometimes described as fee-free amounts or buffer zones²². Experian gives the example that the first £25 of your overdraft may be interest-free⁵, and StepChange notes that some arranged overdrafts have an agreed amount you pay no interest for, for example the first £50 of your overdraft¹⁶.

Banks have used larger buffers at times. During the coronavirus period, FCA guidance stated that in the case of an arranged overdraft with a limit of £500 or below, the entire balance should be interest-free²⁶. Barclays offered a fee-free buffer of £750 on all pre-arranged overdrafts, along with a temporary interest rate of 19.51% EAR²⁷. These were temporary measures, but they show the scale of buffer some banks have offered.

Student accounts are where interest-free overdrafts are most common. National Debtline advises that when looking at student bank accounts you consider the amount of interest-free overdraft you can have, the charges and interest on authorised and unauthorised overdrafts and loans, and how long you can keep using the account after graduation²⁸. Business Debtline adds a note that applies more widely: if the overdraft is interest-free, you could treat such debts as priorities so that you keep the overdraft, because if the bank starts charging interest, your overdraft could increase very quickly²⁹. The guides to student bank accounts and graduate accounts cover how these work.

Overdrafts are repayable on demand

The feature of an overdraft that most distinguishes it from a loan is that it is repayable on demand. This means a bank can ask you to pay the whole amount back in one go if they choose to³⁰. National Debtline's guidance is consistent on this point across its pages: overdrafts are repayable on demand, so your money would no longer be safe if you were, for example, keeping savings in the same account while overdrawn³¹.

This has two practical consequences. First, an overdraft is not a safe way to hold debt long term, because the terms can change. The bank could take the overdraft away if it thinks you are over-using it and are in financial difficulty; it is not guaranteed¹. Your bank can decide to cancel or lower your overdraft limit at any time, but must warn you, and this may be more likely if you keep going over your limit⁵.

Second, money in an overdrawn account is not protected in the way savings in a separate account are. Because the overdraft is repayable on demand, funds paid into the account can go straight to reducing the debt rather than being available to you³¹. This is one reason to separate your overdraft from day-to-day banking, covered below, and it is also the basis of the bank's right of set-off, explained on the page about when your bank can take money for a debt.

How overdraft use affects your credit score

Overdraft use appears on your credit file, and how you use it matters. Your credit rating can be affected if you often go over your overdraft limit, or if you owe too much on your overdraft²¹. Experian states that your score may go down if you keep using an unarranged overdraft or your bank defaults your account⁵.

Living in your overdraft can therefore make other borrowing harder or more expensive, at exactly the time you might need it. The effects are not automatic: an arranged overdraft used within its limit and managed well is not itself a problem, and many people dip into one occasionally without damage. The risk comes with repeated unarranged use, a persistently high balance, or a default, which is what happens when the bank closes the arrangement and treats the debt as unpaid.

If you are worried about the effect on your file, the page on how current accounts affect your credit file explains what banks report and how to check your record. The general guide to credit scores and credit reports covers how to see your file and correct errors.

Ways to reduce or clear an overdraft

There are several recognised routes out of an overdraft, and StepChange sets them out³². The first is to reduce your overdraft use over time, by finding savings in your budget and talking to the lender about monthly payments. Lenders could agree to reduce your overdraft limit over time, or stop interest and charges for a while. Second, you can change your Direct Debits and standing orders to go out at the same time, soon after income arrives, so the account is not dipping into the red mid-month. Third, you can separate your overdraft from day-to-day banking by setting up a new account with no overdraft, so the debt is visible and static rather than being spent into again. Fourth, you can repay the balance using credit with a lower interest rate, such as a balance transfer to a credit card or an affordable loan. Fifth, using savings to pay your overdraft saves you money in the long term, since the overdraft rate is almost certainly higher than any savings rate.

The FCA's rules on repeat overdraft use add a further option. A firm must promptly communicate with the customer, highlighting the customer's pattern of overdraft use, encourage them to make contact, explore the reasons for the pattern of use, identify and set out suitable options to reduce overdraft use and provide support, and warn that failure to engage may lead to suspension or removal of the overdraft facility or a reduction in the credit limit³³. The options a firm could identify may include advice on budgeting and money management; forbearance and other support including reducing or waiving interest and other charges, refinancing to an alternative credit agreement on more favourable terms, or agreeing staged reductions in the overdraft limit and balance; or a reduction in the credit limit or suspension or removal of the overdraft facility where these would not cause financial hardship³⁴. FCA guidance has also directed firms to offer further support with the cost of the overdraft, such as further reducing interest or waiving interest and other charges, and to offer a structured repayment programme³⁵.

If you are considering borrowing to clear the overdraft, note that you cannot claim tax relief for interest on overdrafts or credit cards³⁶, and that the comparison between an overdraft and other borrowing is covered on the overdraft vs personal loan page. The page on struggling to repay an overdraft goes deeper on the options, and the wider debt guide sets out where free advice fits.

Where to get help if you are struggling or want to complain

If you are struggling with overdraft costs, the first step is to contact your bank. Banks might, for example, reduce or waive interest, offer a continuation of overdraft borrowing at the current rate of interest, or agree a repayment programme, possibly including a personal loan¹. Free, impartial debt advice is available from StepChange, National Debtline and Business Debtline, whose guides are cited throughout this page, and MoneyHelper also offers free support.

If you complain to your bank and are not satisfied with the outcome, you can take your complaint to the Financial Ombudsman Service¹. The ombudsman can order a range of remedies, including refunding overdraft fees or interest, paying out a cheque the bank did not honour, returning money paid to the wrong person, and compensation for distress or inconvenience³⁷. Overdraft complaints are a significant workload: 1,528 were opened with the ombudsman in the first quarter of 2026/27, of which 22% were upheld, up from 1,100 in the same quarter a year earlier³⁸.

If the underlying problem is that the overdraft itself is unaffordable, a basic bank account is one option: as you will not have an overdraft facility you will not be charged interest on the account, and there will also be no fees for returned Direct Debits or standing orders⁸. The pages on basic bank accounts and on switching while overdrawn cover the practical steps, and you can switch using the Current Account Switch Service even if you are overdrawn, provided the new bank's overdraft covers what you owe⁴⁰.