The best overdraft in the UK

We look at the best bank accounts for overdrafts.

Overdrafts are rarely a good idea, but when times are hard, they can be unavoidable. So here’s a three-step guide on how to go into the red without incurring too much damage.

1. Get permission

If you think your current account is about to go into the red, make sure that you speak to your bank immediately.

By speaking to your bank, you may get permission to have an arranged overdraft. If you do nothing and go into the red, you’ll have an unarranged overdraft and you’ll almost certainly be hit by higher fees and/or higher interest rates. You’ll also damage your credit rating.

Look at these three accounts and how much they charge for unauthorised borrowing:

Let’s imagine you’re a Natwest Select account holder and you have a £500 unauthorised overdraft. If you stayed in the red for 20 days, you’d end up paying £120 in fees! That’s a shockingly high charge for a loan that lasts for less than a month.

The message is clear: unauthorised overdrafts are a very expensive way to borrow.

2. Get a top-quality current account

If you get permission for your overdraft, you’ll probably pay lower interest charges and fees.

That said, not all current accounts are the same.  Even an authorised overdraft can be pretty expensive with some accounts. For example, if you have an authorised overdraft on the Lloyds TSB account, you’ll pay interest of 19.3% plus a monthly overdraft fee of £5.

However, there are a couple of accounts that offer cracking terms for an authorised overdraft and they’re well worth going for.

First up is the Santander Preferred Current Account.  If you already have an overdraft with another bank you can switch it to this account and you won’t have to pay any interest on your debt for a year. Santander will match your existing overdraft (depending on your circumstances) up to as much as £5,000. You can’t borrow more cheaply than that!

You’ll also get a £100 reward when you open this account. In fact, you’ll get a £200 reward if you already have a mortgage with Santander and you’ll get £300 if you have a Santander mortgage and at least £10,000 in a Santander savings account.

The First Direct 1st Account is another very attractive account.  Account holders get an interest-free overdraft up to £250 which gives you a nice bit of flexibility if you overspend one month.

As with Santander, there’s also a £100 reward on offer if you switch your current account to First Direct. (But no extra rewards of two or three hundred pounds.) On top of that, you’re almost certain to get great customer service from First Direct as the bank consistently tops polls for looking after its account holders.

There is one catch though - you need to pay in at least £1,500 a month into your account. If you can’t do that, you’ll have to pay a fee of £10 a month.

3. Alternatives to overdrafts

If you need some extra cash for whatever reason, it’s important to remember that overdrafts aren’t the only option.

If your credit rating is strong, you can probably get a 0% credit card which are often the best way to borrow.

Rates on personal loans are also coming down – you can now get a loan for as little as 6.3% which is far cheaper than most bank overdrafts.

Find out more in The best ways to borrow.

Whatever route you choose, just make sure you don’t borrow more than you can afford. Even an interest-free loan is dangerous if you can never afford to pay it back.

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