Labour Proposing to Cap Overdraft Charges

May 11, 2018 9:41 am Published by Debt Free Life

Recently shadow chancellor John McDonnell discussed the Labour plan to cap the “national scandal” of overdraft fees and interest. He stated that “Too many families are having to rely on borrowing just to get to the end of the month and are facing huge costs from our High Street banks.”

Labour has estimated that the proposed changes could save families struggling with debt around £86 per year. He went on to state that “The national scandal of the low paid debt trap has to end. More needs to be done to level the playing field and bring greater fairness in consumer finance.”

The party also made the point that charges from overdraft debt could incur costs up to four times higher than borrowing from payday companies, despite the fact that this practice by high street banks flies relatively under the radar.

Labour Proposing to Cap Overdraft Charges

This new policy would cap the charges that could be charged on overdraft borrowing to £24 per £100 borrowed. This would apply to all interest and fees that were charged on the loan. This cap would bring overdraft borrowing more in line with payday loans after recent governmental legislation.

Michael Sheen, who has spent his time recently promoting the importance of fair borrowing, highlighted that problem loans were a broader issue than payday and doorstep loan companies. He made the point that “Millions of people across the UK are also trapped in their overdrafts by extortionate rates of interest charged by reputable high street banks.”

Regardless of whether Labour implement the proposed policy, it at least highlights the dangers of overdrafts and the poor practices of high street banks.

What Is Overdraft Borrowing?

There are different types of overdraft borrowing. Arranged overdrafts can be a useful way of covering the multiple unexpected costs that you come across in life. If you talk to your bank, they might agree to give you an overdraft, which means the charges that are incurred when you need to borrow some extra money are reduced.

What is Overdraft Borrowing?

However, the interest rates involved with even arranged overdrafts can be incredibly high. This means that if the overdraft is not addressed quickly, the debt can very quickly spiral out of control. What started as benign borrowing for something like essential home repairs or car trouble can become unmanageable very quickly.

Unarranged overdrafts, on the other hand, are much more problematic. They hold the same high-interest rates that arranged overdrafts do yet carry other tremendously high charges. If you go into this type of overdraft, then the bank will charge you a considerable amount of money for the privilege.

If, for example, you make a purchase of £70 but only have £40 in your account, many banks will automatically lend you the extra money you need. However, this will carry with it instant charges that will continue until the debt is paid. When paired with the troubling interest rates this is a very potent and dangerous combination.

What Makes Overdrafts so Problematic?

Overdrafts are dangerous because they are so accessible. It means they have become one of the most common and problematic sources of unmanageable debt for people throughout the UK. Unlike bank loans or credit cards, there is no credit check – regardless of your financial situation, it is very likely you will be able to apply for an overdraft.

They are also very easy to fall into. A lot of people enter them by mistake, by forgetting to account for a direct debit or perhaps by miscalculating how much they had left before a purchase. Before you know it, you can be footing bills from the bank when you never intended on dipping into your overdraft in the first place!

What Should I Do If I Am Facing Overdraft Debt?

If you are facing overdraft debt that you are finding unmanageable, there are many official and fully-legislated debt solutions that can help you get back on top of things. Overdrafts are a form of unmanageable debt, which means they can be included in things like Trust Deeds and IVAs.

Our team of specialist advisers can offer free information on what options you have available to you and, should you choose to move forward, can assist you in setting up your debt solution. We help over 6000 people a year take back control from creditors and write off their debt, all we need is for you to get in contact.

Give us a call on 0800 808 5124 and one of our friendly team will be happy to have a chat with you.

Alternatively, click the ‘Speak to an Adviser Now’ button at the top to start a live chat now.

Lastly, feel free to drop an e-mail to and we will be in touch as soon as we can.








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