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Overdrafts and other bank debts

Overdrafts and bank loans can be easy ways of borrowing money quickly. But they may cost more than you think, especially if you go overdrawn without asking your bank first. Always make sure you understand the interest rates, fees and terms involved when you borrow money.

Borrowing from banks

Before you borrow money, always consider whether:

you really need a loan
you can afford to repay it

Overdrafts

An overdraft allows you to spend more money than you have in your bank account - up to a limit agreed with your bank. You only pay interest on the overdraft money you use, and you don't have to tell the bank what you're using the money for.

If you go over the limit, or overdraw without arranging it with your bank first, you may have to pay a penalty charge and a high rate of interest. Your bank will probably charge you for sending you a reminder letter, and for any direct debits or cheques you put through the account. The bank may also freeze your account until the overdraft is paid off - which will mean you won't have access to any money, such as your salary, paid into the account.

Some banks also charge a monthly fee and a fee for setting up the overdraft, so it can be expensive if you borrow a lot of money and don't pay it back quickly.

Bank loans

A loan is a formal arrangement, usually for a fixed period of time (which you agree at the start). If you're thinking about taking out a loan, you'll need to agree with your lender:

how much money you can borrow
how long you can borrow it for
how much interest you'll pay

You'll need to check the monthly repayments carefully to make sure you'll be able to afford them. It's also a good idea to shop around for the best deal before you make a decision. Also, make sure any debt isn't secured against your home.

What to do if you have difficulty with repayments

Money you owe to your bank is a non-priority debt, which means that you might not lose your home or go to prison for not paying these debts, but you can still be taken to court by your bank and ordered to pay what you owe – often with extra costs on top.

If you owe your bank money:

make a list of all your debts
decide which ones you need to pay off first
work out your personal budget
calculate how much you can offer to pay each month
talk to your bank about the situation

Managing repayments

If you can't manage your repayments, it's important to contact your lender as soon as possible. The Banking Code commits your lender to look at your position sympathetically and positively - they'll often be prepared to discuss options such as changing the rate of repayment, letting you stop paying for a while or paying off the loan over a longer period.

Missing repayments

If you regularly miss repayments and don't talk to your lender about your circumstances, your bank could take you to court for non-payment and get a County Court Judgment (CCJ) against you. This will count against you if you apply for credit in any form in the future.

Negotiating with your bank

It's always worth trying to get your bank to offer a better deal on rates and conditions.

Whenever you're negotiating a loan or overdraft, it's a good idea to show that you've thought carefully about it. As well as talking to the bank, you could write a letter explaining:

your reasons for needing the money
how long you think you'll need it for
how you're going to repay it

It's important to be honest about your financial position. If you're worried about money, it's advisable to get in touch with your bank as soon as possible.

Settling disputes with your bank

If you disagree with a decision, you can complain to your bank. Disputes might be about:

interest added to a loan
extra fees which weren't expected
the withdrawal of a loan facility

Give your bank up to eight weeks to try to resolve your complaint. The bank should then send you a letter setting out its final decision and telling you how to contact the Financial Ombudsman Service (FOS) if you're unhappy with the result.

If you don't receive a final letter within eight weeks, and you don't want to give the bank more time, you can contact the FOS for a complaints form.

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