Advantages and disadvantages of an overdraft

Thinking of using an overdraft? We weigh up the pros and cons of doing so.

Most of us find ourselves strapped for cash at times, and this is where an overdraft can come in handy. But while there are many benefits to using an overdraft, there are also a number of downsides to consider.

What are the advantages of an overdraft?

There are a number of advantages to using an overdraft. These include:

  • Flexible borrowing. An overdraft is there when you need it, so you can dip in and out of it as required.
  • No fixed repayments. Unlike with a loan, there are no fixed repayments with an overdraft – you simply pay back what you can, when you can.
  • Quick to apply for. You might be automatically given an overdraft when you open a current account, or if not, it’s quick to apply for one separately.
  • Easy to ask for an increase. You can ask for your overdraft to be increased (or reduced) at any point.
  • Interest-free buffer. Some banks or building societies offer an interest-free buffer on their overdrafts, or in a few cases, you might have an interest-free overdraft for a year or more. Many student accounts offer interest-free overdrafts.

What are the disadvantages of an overdraft?

Of course, there are also downsides to using an overdraft. These include:

  • Lower borrowing limits. You can’t borrow as much with an overdraft as you can with a loan.
  • Expensive way to borrow. Many overdrafts come with high rates of interest – this can be as much as 40% in some cases, making it a costly way to borrow.
  • Difficult to get out of debt. Since there is no repayment term, it’s easy to overspend and stay in your overdraft permanently.
  • Your bank can reduce or cancel your overdraft. An overdraft is a form of credit that can be taken away at any time, even without notice.

Compare bank accounts with an overdraft facility

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Name Product Finder score Account fees Funding requirement Interest (AER) Arranged overdraft Incentive Representative example Link
OFFER
Everyday Current Account
4.1
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Β£0
No minimum funding requirement
0% AER
39.94% EAR variable
tag iconA simple and straightforward current account, with no monthly fee.
Current account switch service guarantee badge
Limited Offer: Get a free 4-year Santander Railcard worth Β£100 when you open an Everyday Current Account . You must be aged 20 to 25 on 30/06/2024, not already have a Santander current account and pay at least Β£500 into your account by 14/05/2024. T&Cs apply.
Representative example: If you use an arranged overdraft of Β£1,200, you'll be charged interest at 39.94% EAR variable.
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CASHBACK
Edge Current Account
Not yet rated
Β£3 per month
Min. Β£500 Per Month (Minimum two direct debit mandates on account per month)
0% AER
39.94% EAR variable
tag iconEarn cashback every month on selected household bills and essential spend.
Current account switch service guarantee badge
Limited Offer: Get a free 4-year Santander Railcard worth Β£100 when you open an Edge current account . You must be aged 20 to 25 on 30/06/2024, not already have a Santander current account and pay at least Β£500 into your account by 14/05/2024. T&Cs apply.
Representative example: If you use an arranged overdraft of Β£1,200, you'll be charged interest at 39.94% EAR variable. Account fee of Β£3 per month.
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CASHBACK
Spend & Save
4.4
β˜…β˜…β˜…β˜…β˜…
Β£0
No minimum funding requirement
0% AER
39.9% EAR variable
tag iconEarn Β£5 cashback a month when making 20 or more debit card payments each month..
Current account switch service guarantee badgeIf you use an arranged overdraft of Β£1,200, you'll be charged interest at 39.9% EAR variable/APR representative.
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OFFER
Premier Select
Not yet rated
Β£0
No minimum funding requirement
0% AER
Arranged overdraft available. Subject to eligibility.
tag iconNo foreign transaction fees on purchases abroad (ATM withdrawals & local fees may apply).
Current account switch service guarantee badge
To apply, you need to be 18+ and a UK resident and have ONE of the following: Pay a minimum Β£100k sole income or Β£120k joint income paid into a NatWest account. Have Β£500k minimum mortgage borrowing with us. A minimum Β£100k savings or investments held with us.
Representative Example: Assumed arranged overdraft of Β£1,200, 19.49% EAR variable p.a. representative 19.5% APR variable. How does NatWest's overdraft compare? Representative APRs help you compare the cost of different credit products.
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Finder Award
OFFER
1st Account
4.4
β˜…β˜…β˜…β˜…β˜…
Β£0
No minimum funding requirement
0% AER
N/A
tag iconSwitch to first direct and get Β£175 plus get access to a 7.00% AER/gross Regular Saver Account.
Current account switch service guarantee badge
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Barclays Bank Account
4.1
β˜…β˜…β˜…β˜…β˜…
Β£0
No minimum funding requirement
0% AER
35.0% EAR (Variable)
tag iconGet more from your everyday banking with Barclays Blue Rewards, with member deals and savings rates. (Eligibility, conditions and a Β£5 monthly fee apply).
Current account switch service guarantee badge

Available to UK residents 18 or over. Manage your money with the Barclays app, Online Banking and more. You must be 18 or over to access this product in the app. T&Cs apply.

Representative Example: If you use an arranged overdraft of Β£1,200, you will be charged 35.0% EAR (variable).

Representative APR: 35.0% (variable). Subject to application, financial circumstance and borrowing history.

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CASHBACK
Spend & Save Plus
Not yet rated
Β£3 per month
No minimum funding requirement
0% AER
N/A
tag iconEarn Β£5 cashback a month when making 20 or more debit card payments each month..
Current account switch service guarantee badge Account fee of Β£3 per month.
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Current Account
4.0
β˜…β˜…β˜…β˜…β˜…
Β£0
No minimum funding requirement
0% AER
35.9% EAR variable
Current account switch service guarantee badge
Aged 16 or over, or 18 or over when requesting the optional overdraft. Subject to status and eligibility.
Representative example: If you use an arranged overdraft of Β£1,200, you'll be charged interest at 35.9% EAR variable.
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Premier Current Account
4.1
β˜…β˜…β˜…β˜…β˜…
Β£0
Eligibility criteria applies. See below.
0% AER

Current account switch service guarantee badge
To be eligible for Premier Banking you’ll need to have either (1) an annual gross income of Β£75,000 or more paid into a Barclays current account or (2) a minimum of Β£100,000 saved or invested with Barclays.
Representative example: 0% interest (variable) payable on arranged overdrafts up to Β£500. If you use an arranged overdraft above this amount the annual rate of interest is 35.0% (variable). 19.5% APR Representative (variable), based on Β£1,200 overdraft balance. Overdrafts, including free amounts, are subject to application, financial circumstances and borrowing history.
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CASHBACK
Santander Edge Up Current
Not yet rated
Β£5 per month
Min. Β£1500 Per Month (Minimum two direct debit mandates on account per month)
3.51% AER
39.94% EAR variable
tag iconEarn cashback every month on selected household bills and essential spend plus interest on your balance.
Current account switch service guarantee badge
Limited Offer: Get a free 4-year Santander Railcard worth Β£100 when you open an Edge Up current account . You must be aged 20 to 25 on 30/06/2024, not already have a Santander current account and pay at least Β£500 into your account by 14/05/2024. T&Cs apply.
Representative example: If you use an arranged overdraft of Β£1,200, you'll be charged interest at 39.94% EAR variable. Account fee of Β£5 per month.
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Select Account
4.3
β˜…β˜…β˜…β˜…β˜…
Β£0
No minimum funding requirement
0% AER
39.49% EAR variable (subject to status)
tag iconFree 24/7 Emergency Cash Service to withdraw up to Β£300 for online and telephone banking customers or Β£60 if not.
Current account switch service guarantee badgeRepresentative Example: Effective Annual Rate: 39.49% EAR (variable). Representative APR: 39.49% APR (variable). Assumed credit limit: Β£1,200 Subject to status. How does this overdraft compare? Representative APRs help you compare the cost of different credit products.
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Reward
Not yet rated
Β£2 per month
Min. Β£1250 Per Month
0% AER
39.49% EAR variable (subject to status)
tag iconEarn 4 Rewards per month by making at a minimum of 2 direct debit payments of at least Β£2 each.
Current account switch service guarantee badgeRepresentative Example: Effective Annual Rate: 39.49% EAR (variable). Representative APR: 39.49% APR (variable). Assumed credit limit: Β£1,200 Subject to status. How does this overdraft compare? Representative APRs help you compare the cost of different credit products.
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Select Account
4.1
β˜…β˜…β˜…β˜…β˜…
Β£0
No minimum funding requirement
0% AER
39.49% EAR variable (subject to status)
tag iconFree 24/7 Emergency Cash Service to withdraw up to Β£300 for online and telephone banking customers or Β£60 if not.
Current account switch service guarantee badgeRepresentative Example: Effective Annual Rate: 39.49% EAR (variable). Representative APR: 39.49% APR (variable). Assumed credit limit: Β£1,200 Subject to status. How does this overdraft compare? Representative APRs help you compare the cost of different credit products.
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Bank Account
4.1
β˜…β˜…β˜…β˜…β˜…
Β£0
No minimum funding requirement
0% AER

(Subject to status)
tag iconDiscounts and exclusive offers for dining experiences, leisure activities and shopping available through HSBC home&Away.
Current account switch service guarantee badgeRepresentative example: 0% EAR (variable) on the first Β£25, 39.9% EAR (variable) on anything above that, giving a representative annual percentage rate (APR) of 38.9% APR (variable). Based on an arranged overdraft of Β£1,200.
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HSBC Advance Bank Account
Not yet rated
Β£0
No minimum funding requirement
0% AER
39.9% EAR variable
tag iconDiscounts and exclusive offers for dining experiences, leisure activities and shopping available through HSBC home&Away.
Current account switch service guarantee badgeRepresentative example: If you use an arranged overdraft of Β£1,200, you’ll be charged interest at at 39.9% EAR variable.
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How does an overdraft work?

There are 2 types of overdraft – arranged and unarranged. An arranged (or authorised) overdraft is one you’ve agreed with your bank in advance. Some arranged overdrafts might come with an interest-free buffer, meaning you won’t be charged interest if you dip into your overdraft by this amount. However, it tends to only be around £10.

An unarranged (or unauthorised) overdraft, on the other hand, is where you haven’t agreed to an overdraft with your bank but spend more than you have in your account. It can also include going over the limit of your authorised overdraft.

Interest rates and fees on unarranged overdrafts used to be a lot higher than arranged overdrafts. However, new rules introduced in April 2020 mean that banks must now charge a single annual interest rate on all overdrafts, making it easier for customers to compare charges. Interest rates for unarranged overdrafts can no longer be higher than for arranged overdrafts, and rates tend to range from 19% to 40% APR.

Are there any alternatives to an overdraft?

Yes, there are several alternatives to using an overdraft. One is a 0% purchase credit card, which you can use to spread the cost of your spending interest-free over a number of months. Just make sure you clear the balance before the 0% deal ends.

Alternatively, you could use a low APR credit card, which charges a low rate of interest for the life of the debt. This means you can use it for ad hoc purchases, and the interest rate charged will likely be a lot lower than on an overdraft.

You could also consider a money transfer credit card. This lets you move money from your credit card into your bank account. You can then use these funds for purchases or to pay off existing debt. If you choose a card with a 0% introductory offer, you’ll also avoid paying interest for several months. Just watch out for the transfer fee.

Finally, if you need to borrow a lump sum of cash, you could consider applying for a personal loan. Interest rates are generally far more competitive than overdraft rates, but you need to pay back the amount borrowed in fixed monthly repayments over a set term.

Bottom line

Overdrafts can be useful as a backup if you suddenly need extra cash to pay for emergency car repairs or to cover an unexpected bill, for example. However, they should be considered a short-term form of borrowing only, as interest rates on overdrafts can be very high. If you plan to use an overdraft for the long term, it’s better to seek out cheaper alternatives.

Banking scores

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