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

1 - 15 of 85
Name Product UKFSA-CUR Finder Score Account fees Funding requirement Interest (AER) Arranged overdraft Incentive Representative example Link
Finder Award
OFFER
first direct 1st Account
4.5
★★★★★
£0
No minimum funding requirement
0% AER

Switch to a 1st Account and get £175*. Requires credit check. New customers only and T&Cs apply.
Current account switch service guarantee badge
*Within 45 days of your account opening you need to switch to first direct using the Current Account Switch Service (including at least 2 Direct Debits or standing orders), deposit £1,000, make 5+ debit card payments and log in to digital banking. New customers only, who haven’t previously held a first direct product.
Representative Example: How does our overdraft compare? The representative APR shows the cost of borrowing over a year, so you can use it to compare the cost of our overdraft against other overdrafts and ways of borrowing.
0% EAR variable on the first £250, 39.9% EAR variable thereafter, giving a representative rate of 30.5% APR variable (assumed arranged overdraft £1,200).
For customers with an offset mortgage linked to a 1st Account, the interest-free limit will not apply.
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Starling Current Account - Age 18 and over
4.7
★★★★★
£0
No minimum funding requirement
3.25% AER
15% EAR variable
Current account switch service guarantee badge
Starling Bank are removing the interest rate from their personal and joint current accounts on 10 February 2025.
Representative example: If you use an arranged overdraft of £1,200, you'll be charged interest at 15% APR variable. Representative APRs help you compare the cost of different credit products. Subject to financial status.
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Finder Award
CASHBACK
TSB Spend & Save Account
4.3
★★★★★
£0
No minimum funding requirement
0% AER
39.9% EAR variable
Earn £5 cashback a month for 6 months when making 20 or more debit card payments each month. T&Cs apply.
Current account switch service guarantee badgeIf you use an arranged overdraft of £1,200, you'll be charged interest at 39.9% EAR variable/APR representative.
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OFFER
NatWest Premier Select Account
3.9
★★★★★
£0
No minimum funding requirement
0% AER
34.49% EAR (variable)
No 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 £100k sole income or £120k joint income paid into a NatWest account. Have £500k minimum mortgage borrowing with us. A minimum £100k savings or investments held with us.
Representative Example: Assumed arranged overdraft of £1,200. Effective annual interest rate 0% on arranged overdrafts up to £500, 34.49% EAR (variable) above £500. Representative 20.1% APR (variable). How does this overdraft compare? Representative APRs help you compare the cost of different credit products.
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Monzo Free Account
4.6
★★★★★
£0
No minimum funding requirement
0% AER

39% EAR variable
Monzo Instant Access Savings Pot earns you 3.60% AER interest (variable), paid monthly into the Pot you create.
Current account switch service guarantee badgeRepresentative example: If you use an arranged overdraft of £1,200, you'll be charged interest at 39% EAR variable. Account fee of £0.
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Royal Bank of Scotland Select Account
4.2
★★★★★
£0
No minimum funding requirement
0% AER
39.49% EAR variable (subject to status)
Current account switch service guarantee badge
You must be 18+ and a UK resident.
Representative Example: Effective Annual Rate: 39.49% EAR (variable). Representative APR: 39.49% APR (variable). Assumed credit limit: £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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Finder Award
CASHBACK
TSB Spend & Save Plus Account
4.5
★★★★★
£3 per month
No minimum funding requirement
0% AER
N/A
Earn £5 cashback every month when you make 20 debit card payments each calendar month. T&Cs apply.
Current account switch service guarantee badge Account fee of £3 per month.
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NatWest Reward Account
4.2
★★★★★
£2 per month
Min. £1250 Per Month
0% AER
39.49% EAR variable
You must be 18+ and a UK resident. Earn up to £5/month in Rewards (£4 with 2x +£2 direct debits set up, £1 for monthly app log in) and from 1% in Rewards when you spend with selected partners..
Current account switch service guarantee badgeRepresentative Example: Effective Annual Rate: 39.49% EAR (variable). Representative APR: 39.49% APR (variable). Assumed credit limit: £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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Royal Bank of Scotland Reward Account
4.2
★★★★★
£2 per month
Min. £1250 Per Month
0% AER
39.49% EAR variable
You must be 18+ and a UK resident. Earn up to £5/month in Rewards (£4 with 2x +£2 direct debits set up, £1 for monthly app log in) and from 1% in Rewards when you spend with selected partners..
Current account switch service guarantee badgeRepresentative Example: Effective Annual Rate: 39.49% EAR (variable). Representative APR: 39.49% APR (variable). Assumed credit limit: £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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OFFER
Everyday Current Account
4.1
★★★★★
£0
No minimum funding requirement
0% AER
39.94% EAR variable
Earn £150 cash when you switch to a Santander Everyday current account. To receive the £150, simply open an account, set up 2 direct debits and pay in £1,500 within 60 days. T&Cs apply.
Current account switch service guarantee badgeRepresentative example: If you use an arranged overdraft of £1,200, you'll be charged interest at 39.94% EAR variable.
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Monzo Extra
Not yet rated
£3.00 per month
No minimum funding requirement
0% AER

39% EAR variable
Get the best of Monzo money management: see your other banks and credit cards in Monzo, credit insights, personalised spending categories and more.
Account fee of £3 per month. 18+ only. T&Cs apply. You must have a Monzo Current Account to sign up to Monzo Extra.
Representative example: If you use an arranged overdraft of £1,200, you'll be charged interest at 39% EAR variable. Account fee of £3 per month.
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CASHBACK
Santander Edge Current Account
4.4
★★★★★
£3 per month
Min. £500 Per Month (Minimum two direct debit mandates on account per month)
0% AER
39.94% EAR variable
Earn £150 cash when you switch to a Santander Edge current account. To receive the £150, simply open an account, set up 2 direct debits and pay in £1,500 within 60 days. T&Cs apply.
Current account switch service guarantee badgeRepresentative example: If you use an arranged overdraft of £1,200, you'll be charged interest at 39.94% EAR variable. Account fee of £3 per month.
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CASHBACK
Santander Edge Up Current
4.4
★★★★★
£5 per month
Min. £1500 Per Month (Minimum two direct debit mandates on account per month)
3% AER
39.94% EAR variable
Earn £150 cash when you switch to a Santander Edge Up current account. To receive the £150, simply open an account, set up 2 direct debits and pay in £1,500 within 60 days. T&Cs apply.
Current account switch service guarantee badgeRepresentative example: If you use an arranged overdraft of £1,200, you'll be charged interest at 39.94% EAR variable. Account fee of £5 per month.
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NatWest Select Account
4.3
★★★★★
£0
No minimum funding requirement
0% AER
39.49% EAR variable (subject to status)
Current account switch service guarantee badge
You must be 18+ and a UK resident.
Representative Example: Effective Annual Rate: 39.49% EAR (variable). Representative APR: 39.49% APR (variable). Assumed credit limit: £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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Barclays Bank Account
4.1
★★★★★
£0
No minimum funding requirement
0% AER
N/A
Eligible for Barclays Blue Rewards.
Current account switch service guarantee badge
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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

★★★★★ — Excellent
★★★★★ — Good
★★★★★ — Average
★★★★★ — Subpar
★★★★★ — Poor

Finder scores, in blue, are based on our expert analysis. We also show reviews from users, where we've received more than 10, with a score in yellow. We gather more reviews from customers every year in Finder's customer satisfaction survey.

To find out more, read our full methodology.

We show offers we can track - that's not every product on the market...yet. Unless we've said otherwise, products are in no particular order. The terms "best", "top", "cheap" (and variations of these) aren't ratings, though we always explain what's great about a product when we highlight it. This is subject to our terms of use. When you make major financial decisions, consider getting independent financial advice. Always consider your own circumstances when you compare products so you get what's right for you. Most of the data in Finder's comparison tables has the source: Moneyfacts Group PLC. In other cases, Finder has sourced data directly from providers.
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Writer

Rachel Wait is a freelance journalist and has been writing about personal finance for more than a decade, covering everything from insurance to mortgages. She has written for a range of personal finance websites and national newspapers, including The Observer, The Mail on Sunday, The Sun and the Evening Standard. Rachel is a keen baker in her spare time. See full bio

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