Recent research regarding unauthorized overdraft charges from High Street banks revealed a very alarming situation. Some banks are charging an APR of more than 819,000 percent, which is enough put any customer into shock. The British Banking Association (BBA) has referred to using APR to calculate overdraft charges as “mathematical manipulation” but is willing to address relevant issues.
The Radio 4 Money Box program revealed that a customer exceeding a bank overdraft limit by £100 for 28 days must repay £200. This equates to an 819,100 percent APR. Eric Leenders with the BBA said the fee is considered representative of borrowing on unauthorized overdraft, not of borrowing a certain amount of money. Govan Law Center representative Mike Dailly referred to the figures as “eye-watering.”
Comparing these overdraft APRs to charges for payday loans is even more revealing. Payday lenders charge 5,000 percent or less to borrow £100 for 28 days. Lloyds TSB and Santander charge an equivalent APR that exceeds 300,000 percent. Santander commented that comparing payday loans is misleading due to the unauthorized nature of the overdrafts. Barclays, however, charges an APR of 366,000 percent for use of a pre-arranged personal reserve.
As U.S. states outlaw or cap the cost of payday lending, many lenders have relocated to the UK. They want to do business in impoverished areas, offering a way to consolidate debt or get emergency cash. Banks typically view these lenders with disdain but it turns out they may not be much better. Money Box claimed it received a large number of email complaints this year from bank customers regarding overdraft charges. Mr. Dailly echoed the sentiment that many customers are worried about the situation.
In the past ten years, the market for payday lending has grown rapidly, representing £1.9 billion in 2010. Customers typically receive a maximum of £1,000 for up to one month. Lenders process applications quickly, often providing borrowers with money the same day. The cost of this speedy service is a loans APR of about 2,000 percent. Payday lenders help consumers who cannot get approved for loans bank offered but some people feel this credit is too easy to obtain.
The Citizens Advice Bureau is one entity calling for tighter regulation of the payday lending industry. Ed Davey, the consumer minister, feels that this move could cause people to turn to illegal loan sharks. The Department for Business, Innovation and Skills (BIS) is aware of the increased use of payday lending and has begun discussions with the industry regarding enhancing consumer protection.
In a November report from the BIS, High Street banks were depicted as delivering a “fairer, more competitive market” for consumer credit. However, unauthorized borrowing of just £100 for 28 days results in charges of £86 from Lloyds TSB, £88 from Barclays, and £100 from Santander. Borrowing the same amount over the same period from a payday lender costs only £42. The BBA’s Mr. Leenders stated that an arranged overdraft or credit card is a better way to obtain small amounts of credit over the short-term.