Overdrafts Explained UK: Costs, Rules, and How to Get Out

Quick answer: A UK bank overdraft lets you spend more than is in your account, up to an agreed limit. Since FCA rule changes in 2020, overdrafts are charged as a single annual interest rate (typically 35-40% APR) — daily and monthly fees were abolished. Overdrafts are one of the most expensive forms of borrowing. To clear yours: switch to a 0% overdraft account, use a 0% balance transfer card, or pay it down £50/month. Source: FCA — Overdrafts.

Overdrafts Explained UK

An overdraft can be a useful safety net or an expensive debt trap. This guide explains how UK overdrafts work, what they cost, and how to escape them.

What Is an Overdraft?

An overdraft is a facility on your current account that lets you borrow money when your balance reaches zero (or below). There are two types:

Arranged Overdraft

Pre-agreed with your bank
You have a set limit (e.g., £500 or £1,500)
Charged at a single interest rate (APR)

Unarranged Overdraft

You spend beyond your balance without an agreed facility
Or you exceed your arranged limit
Same interest rate applies (since FCA reforms)
Banks can no longer charge higher fees for unarranged vs arranged

How Much Do Overdrafts Cost?

Since the FCA overdraft reforms in April 2020, all overdrafts are charged as a single annual interest rate:

Bank	Typical Overdraft APR (2026)
High street banks (Barclays, Lloyds, HSBC)	35–39.9%
Digital banks (Monzo, Starling)	15–35%
Building societies	25–35%

Example: A continuous £500 overdraft at 39.9% APR costs approximately £199.50 per year in interest — that’s £16.63/month just in charges.

Before the FCA reforms, banks charged up to £90/month in daily fees — the reforms saved consumers over £1 billion annually.

Source: FCA — Overdraft reforms.

Why Overdrafts Are Expensive

At 39.9% APR, overdrafts are:

More expensive than most credit cards (typically 18-25% APR)
More expensive than personal loans (typically 6-15% APR)
Comparable to payday loans (which are now capped at 0.8%/day)
Harder to clear because interest is charged daily and compounds

Read our how to get out of debt guide for a complete strategy.

How to Clear Your Overdraft

1. Switch to a 0% Overdraft Account

Several banks offer interest-free overdraft buffers for new customers:

First Direct: £250 interest-free
Nationwide: 12 months at 0% for switchers
Starling: No interest on small overdrafts

Use the Current Account Switch Service — it takes 7 days and switches everything automatically.

2. Use a 0% Money Transfer Credit Card

Some credit cards let you transfer money to your current account at 0% interest for 12-24 months. This clears the overdraft and gives you time to repay interest-free.

Read our balance transfer credit cards guide for how this works.

3. Pay It Down Gradually

Treat your overdraft as a debt (because it is)
Budget £50-100/month toward reducing it
Ask your bank to reduce your overdraft limit as you pay it down — this prevents re-dipping
Use our budget planner to find the money

4. Ask for Help

If you’re permanently in your overdraft and can’t see a way out:

Contact your bank — they must treat you fairly under FCA rules
Ask about structured repayment plans
Contact StepChange for free debt advice
Read our debt management plans guide

Your Overdraft Rights

Under FCA rules, banks must:

Send you an annual statement showing total overdraft costs
Provide alert notifications when you’re near or over your limit
Offer tailored support if you’re in financial difficulty
Not use overdrafts as a trap — they must help you reduce reliance

Source: FCA — Overdraft help.

Overdraft vs Other Borrowing

Borrowing Type	Typical APR	Best For
Overdraft	35–40%	Very short-term emergencies
Credit card	18–25%	Larger purchases with repayment plan
Personal loan	6–15%	Structured debt repayment
Credit union loan	12–26% APR cap	Small loans, ethical lending
0% balance transfer	0% for 12-24 months	Clearing existing card debt

Read our what is APR guide to understand how APR works.

Frequently Asked Questions

“How much does a UK overdraft cost per month?” | “At the typical 39.9% APR, a £500 overdraft costs about £16.63/month in interest. A £1,000 overdraft costs about £33/month. The longer you stay in overdraft, the more it compounds.” “Can I switch banks with an overdraft?” | “Yes. Use the Current Account Switch Service (CASS). Your new bank will either match your overdraft or offer a lower one. Some banks offer 0% overdrafts to attract switchers. The switch is guaranteed and takes 7 days.” “Are unarranged overdraft fees banned?” | “Since April 2020, banks cannot charge higher fees for unarranged overdrafts than arranged ones. All overdrafts are charged at a single APR. Fixed daily or monthly fees are also banned.” “How do I get out of my overdraft permanently?” | “Switch to a 0% overdraft account or use a 0% money transfer card to clear it, then budget to stay out. Ask your bank to reduce your limit gradually so you can’t accidentally re-dip. Read our how to get out of debt guide for the full strategy.”

Sources and Further Reading

Disclaimer: This guide provides general information about UK overdrafts. If you’re struggling with overdraft debt, contact your bank or StepChange for free help. Never use an unauthorised overdraft provider.