UK banks charging as much as 800,000% on overdrafts

cashpoint machine
Image caption Some people are finding themselves paying extremely high rates to borrow from their overdraft

Some High Street banks are charging "eye-watering" rates of interest when their customers go over their overdraft limit, research by Radio 4's Money Box programme has revealed.

A customer borrowing £100 for 28 days without the consent of Santander would repay £200, for example.

That is the equivalent annualised percentage rate, or APR, of 819,100%.

Eric Leenders, from the British Banking Association, said that the industry was willing to look at concerns.

But he said that using APRs to calculate the cost of unauthorised borrowing was a "mathematical manipulation" because the fees are representative of borrowing on an overdraft facility, not for borrowing the specific amount of money.

Mike Dailly, from the Govan Law Centre, said the government must review unauthorised overdraft charges.

"What we've got here is banks with equivalent APRs of nearly one million percent. It really is eye-watering."

High cost

Comparisons between banks and so-called payday lenders showed that the annualised percentage rate charged for borrowing £100 over 28 days varied from 969% to 819,100%.

No payday loan lender charged an APR of more than 5,000% but two banks - Santander and Lloyds TSB - charged an equivalent APR of more than 300,000%.

Santander told the BBC: "It's is confusing to compare payday loans with overdrafts on current accounts because an unauthorised overdraft charge is for unauthorised use of a current account while a payday loan is an agreed loan facility."

Barclays would charge a customer using a personal reserve - a pre-agreed emergency borrowing facility - £22 for every five consecutive working days they were in it. This means customers would pay £88 on top of the £100 capital after 28 days - an equivalent APR of 366,000%.

Mr Dailly said the situation is worrying for consumers.

"The Romans 2,500 years ago managed to cap lending charges at 8%," he said.

"States in America have outlawed payday loans and effectively capped the cost of lending. These companies have come over to our country and they've said they want to operate in our deprived communities because that's where their business is."

Money Box has received a steady stream of emails from bank customers this year complaining about the level of charges.

One of them, Marc Daffern, from Stamford, was told he had accrued £775 in charges for an unpaid direct debit of £6.99 from his bank, NatWest.

He said: "I was offered to be allowed to pay it off at the lower amount of around £400 but I wasn't willing to do so because as far as I'm concerned I shouldn't owe them any of this money in the first place."

NatWest said that it is investigating Mr Daffern's complaint.

Payday lender growth

The payday loan market has expanded rapidly in the last decade.

Lenders typically lend amounts up to £1,000 for up to a month. Applications are processed quickly and the borrower can typically receive the money the same day. But the quick availability of credit comes at a cost, typically an APR of around 2,000%.

The Citizens Advice Bureau has said it is too easy to obtain such credit and has called for tighter regulation. But Consumer Minister Ed Davey believes that tougher measures could push people into the hands of illegal loan sharks.

Last month, the Department for Business, Innovation and Skills (BIS) published a report on consumer credit.

In the report, the BIS said that commitments made by High Street banks will "deliver a fairer, more competitive market and mark a real improvement for consumers".

The BIS said that it is aware of an upsurge of concern regarding the rapid increase in the use of payday and other instant lending, and dialogue has already started with the industry on introducing enhanced consumer protection in their codes of practice.

The Office of Fair Trading said the payday loan industry was worth about £115m in 2004. According to a report by consumers' association Which? that figure was £1.9bn in 2010.

Bank charges

The maximum charged for borrowing £100 for 28 days from a payday loan company is £42.

That is compared to unauthorised borrowing charges of £100 with Santander, £88 with Barclays and £86 with Lloyds TSB for the same sum of money over the same period.

Mr Leenders, from the BBA, told Money Box: "There are better ways of covering short-term credit for small amounts. It may be more cost effective to arrange an overdraft or put the purchase on a credit card."

In 2009, UK banks won a Supreme Court case that had been brought to challenge the legality of large overdraft charges.

In explaining his ruling, the Supreme Court's president, Lord Phillips, said that bank customers agreed to pay overdraft charges as part of the price of having a current account, so they fell outside the scope of the 1999 consumer contract regulations.

But in the aftermath of the ruling, most banks did agree to reduce the level of their charges.

However, although the charges have been reduced in some cases the number of times a customer can be charged in one month has gone up.

The OFT said that under the Consumer Credit Regulations Act of 2010, businesses do not need to state an APR for "any charges payable due to non-compliance with commitments contained in the consumer credit agreement".

Money Box is broadcast on Saturdays at 12:00 GMT on BBC Radio 4 and repeated on Sundays at 21:00 GMT. You can listen again via the BBC iPlayer or by downloading Money Box podcast.

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