An overdraft allows you to spend more than you have in your current account — essentially short-term borrowing from your bank. While convenient for emergencies, overdrafts at 35–40% EAR are expensive if used regularly. This guide covers how overdrafts work, what they cost, and how to reduce or eliminate reliance on one. For related topics on UK payment methods and what happens when payments go wrong, see the Payments and Transactions hub.
How Overdrafts Work
Feature
Detail
What it is
Permission to go into a negative balance
How it is repaid
Automatically when money arrives in your account
Interest
Charged daily on the overdrawn balance
Typical rate
35–40% EAR (around 3% per month)
Credit check
Required to arrange
Impact on credit file
Reported monthly — heavy use can affect your score
Types of Overdraft
Type
How it works
Cost since April 2020
Arranged (authorised)
Pre-agreed limit with your bank
Interest only at the agreed EAR
Unarranged (unauthorised)
Going overdrawn without permission, or exceeding your limit
Same EAR as arranged — no extra fees since FCA reform
Interest-free buffer
First £0–£500 with no interest (varies by bank)
Free
Key change since 2020: Before the FCA’s overdraft reform, unarranged overdrafts often carried flat daily fees that worked out at APRs of hundreds of percent. These are now banned — banks must charge a single EAR rate applied to all overdraft borrowing.
Overdraft Costs Compared
Interest Rates by Bank
Bank
EAR
Monthly cost on £1,000
First Direct
39.9%
~£33
Monzo
39.9%
~£33
HSBC
39.9%
~£33
NatWest
39.49%
~£33
Nationwide
39.9%
~£33
Lloyds
39.9%
~£33
Starling
15–35% (tiered)
£12–£29
Starling is the notable exception with a tiered rate based on credit profile — some customers pay significantly less than the standard ~40% charged by most banks.
Interest-Free Buffers
Bank
Interest-free buffer
First Direct
£250
M&S Bank
£100
Nationwide FlexDirect
None
Starling
None
Monzo
None
What Happens If You Exceed Your Overdraft?
If you spend beyond your arranged limit, or go overdrawn without an arrangement, your bank may decline the transaction — or allow it and charge the same interest rate as your arranged overdraft. For a detailed breakdown, see What Happens If You Go Over Your Overdraft.
How to Get an Overdraft
Step
Detail
1
Check if your current account includes an overdraft facility
2
Apply online, via the bank’s app, or in branch
3
Bank runs a credit check
4
If approved, limit is set (typically £100–£3,000 for most accounts)
5
Overdraft is available immediately
What Banks Consider
Factor
Impact
Credit score
Higher score = higher limit and potentially lower rate
Income
Regular income increases confidence
Account history
Good management with this bank helps
Existing debt
May reduce what is offered
Previous overdraft use
Good track record with overdraft helps
Overdraft vs Other Borrowing
Feature
Overdraft
Credit card
Personal loan
Interest rate
35–40% EAR
0–29.9% (purchases)
6–15%
Flexibility
Very high — dip in and out
High — revolving
Fixed repayments
Minimum repayment
None — auto-repaid when money arrives
Monthly minimum
Fixed monthly
Best for
Short-term emergencies
Purchases you clear monthly
Planned larger expenses
An overdraft at 39.9% EAR costs more than almost any personal loan. If you find yourself relying on an overdraft for more than a few days each month, switching to a personal loan to clear it — and then cutting the overdraft limit — typically saves significant money. See Personal Loans UK — Complete Guide for how to compare rates.
How to Reduce or Clear Your Overdraft
Step-by-Step Plan
Step
Action
1
Know the total — check exactly how much you owe
2
Set a monthly reduction target — £50–£100 is achievable for most
3
Request a gradual limit reduction — ask your bank to lower it as you pay down
4
Automate savings — move a fixed amount to savings the day you are paid
5
Budget with a framework — see the 50/30/20 rule to prioritise debt repayment
Options to Clear Faster
Option
How it helps
0% balance transfer card
Eliminates interest for 12–29 months — lets repayments attack the balance directly
Personal loan
Lower rate (6–15%) with fixed repayments — converts overdraft into structured debt
Use savings
If overdraft rate (39.9%) exceeds savings rate — it almost certainly does
Increase income
Overtime, side jobs, selling unused items
Cut spending
Review direct debits and subscriptions — redirect savings to the overdraft
Preventing the need for an overdraft in the first place
0% purchase credit card
Short-term spending — cleared monthly, zero cost
Personal loan
Planned larger expenses or clearing overdraft debt
Credit union loan
Lower rates than bank overdrafts for members
Salary advance apps
Very short-term cash — check costs carefully before using
Building a small emergency fund of even £500–£1,000 removes most of the situations where an overdraft becomes necessary. Start by setting up an automatic transfer to a savings account on payday — even £25/month compounds into a meaningful buffer within a year.
If You Are Struggling
Action
Detail
Contact your bank
They may offer a repayment plan, temporary freeze, or hardship support
Government scheme — freezes interest and enforcement for 60 days
For strategies to clear multiple debts, see Debt Repayment Strategies — including the avalanche and snowball methods. If you are considering a formal arrangement, Debt Management Plans Explained covers how they work and what they affect.