Personal finance experts have warned overdraft users to find out just how much they could soon be paying in interest on their facilities as new rules affecting those products come into effect from April.
Martin Lewis, the founder of the website Money Saving Expert, has called on people to take action urgently to avoid finding themselves paying as much as 40 per cent in interest on their overdraft debts.
The Financial Conduct Authority (FCA), which regulates all the UK’s financial markets, is introducing a major overhaul of rules relating to overdrafts and the consequences could be significant for millions of people who borrow money via their bank or building society accounts.
For the FCA, a priority goal in designing its new rules has been to reduce the scale of interest and the frequency of charges consumers are hit with in relation to unarranged overdrafts.
However, in response to the altered rules, several of the biggest banks in the UK will be increasing their interest rates on all their overdraft facilities.
Part of what regulators are insisting of service providers is that they charge for overdraft borrowing based on annual interest rates, rather than daily or monthly charges.
According to the FCA, 70 per cent of all overdraft users will be better off or no worse off as a result of its changes to the relevant rules but the organisation has also noted that “there are some scenarios where consumers will pay more”.
“People who are likely to pay more for an overdraft are those borrowing larger amounts for longer periods of time, who should consider alternatives to borrow more cheaply,” a statement from the FCA make clear.
“Overdrafts were not designed to be used for large amounts for long periods of time,” said Christopher Woolard, the FCA’s executive director of strategy and competition.
“Consumers should consider other methods of credit if they find they need to borrow for longer.”
Martin Lewis though has described overdrafts as now representing a “danger debt” and one that could cause major financial headaches for consumers as 40 per cent interest rates come into effect across the market.
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Millions of low-income households across the UK are being dragged down by debts they accumulated during the pandemic.
People with debt problems should not be afraid to confront the realities of their circumstances and tackle them head on, according to the expert money adviser Martin Lewis.
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