This professional-grade calculator computes the exact cost of using your bank's overdraft facility. Since April 2020, UK regulations require banks to charge only a simple annual interest rate (EAR) on overdrafts, removing confusing daily or monthly fees [citation:1]. Input your details below for a real-time cost breakdown.
An overdraft is a form of credit linked to your current account that allows you to spend more money than you have available. It's designed as a short-term borrowing solution for cash flow management.
A pre-agreed borrowing limit set up with your bank. This typically involves a credit check and comes with a defined Annual Percentage Rate (APR). Since the April 2020 regulatory changes, banks can only charge interest on arranged overdrafts—no additional fixed fees [citation:1]. Many banks offer an interest-free buffer (e.g., £25-£250) within this limit.
Occurs when you spend beyond your balance without a pre-agreed limit. Historically, these incurred much higher charges, but current UK regulations require the same interest rate as arranged overdrafts. However, exceeding any agreed limit may still result in declined transactions or additional account restrictions.
Situation: A freelance designer, Sarah, has a client payment of £2,000 delayed by 10 days. Her business account balance is £300, but she needs to pay a critical software subscription of £600 today.
Calculation: Using her arranged overdraft facility at 29.9% EAR.
Outcome: The cost to bridge her 10-day cash flow gap is less than £2.50, preventing service interruption and potential late fees from her software provider.
Situation: Mark's car requires an urgent £400 repair. He will be overdrawn by £400 for 5 days until his monthly salary is deposited.
Calculation: Using a typical high-street bank rate of 39.9% EAR [citation:1].
Outcome: A £2.19 cost allows Mark to fix his car immediately, maintaining his ability to commute to work, versus a potentially higher cost of alternative transport or lost income.
The interest on an overdraft is calculated daily based on the amount you are overdrawn. The standard formula used by financial institutions is:
Where:
This formula ensures interest is calculated only on the amount you've actually borrowed and for the precise time you use it [citation:4][citation:9]. Some banks use the average daily balance method, calculating interest based on your balance at the end of each day [citation:9].
Interest is calculated daily but is typically added to your account monthly. You will see the total interest charge for the previous month on your bank statement. The daily calculation ensures you only pay for the exact number of days you are overdrawn [citation:1].
Using an arranged overdraft facility within your agreed limit typically does not harm your credit score. Credit reference agencies see it as a form of agreed credit. However, frequently exceeding your limit or entering an unarranged overdraft can be recorded on your credit file and negatively impact your score, as it may indicate financial stress to lenders [citation:1].
Yes, you can request to reduce or remove your overdraft limit at any time by contacting your bank. It's important to note that you must clear any existing overdraft balance before the limit can be reduced or removed. This can be a useful strategy to control spending [citation:1].
EAR (Effective Annual Rate) is the standard way banks must now present overdraft costs. It shows the annual interest rate you'll pay, assuming the interest compounds. APR (Annual Percentage Rate) may include any compulsory fees, but since the 2020 reforms eliminated most overdraft fees in the UK, EAR and APR for overdrafts are now often the same figure, simplifying cost comparison [citation:1].
If you exceed your arranged limit, you enter an unarranged overdraft. Under current UK rules, the interest rate charged should be the same as for your arranged overdraft. However, the bank may decline further transactions, charge a fixed "refused payment" fee, or place restrictions on your account until the balance is brought back within the limit. Regular breaches can lead to the facility being withdrawn [citation:1].
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Disclaimer: This overdraft calculator provides estimates for informational purposes only. The actual charges applied by your financial institution may vary based on your specific account terms, the timing of transactions, and the method used to calculate interest (e.g., average daily balance). Overdrafts are a form of credit that should be used responsibly for short-term needs. Always refer to your bank's terms and conditions for precise information. FinToolsPro does not provide financial advice.
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