Overdraft Interest Calculator UK
Calculate exactly how much your overdraft costs per day, week, month and year. Compare real 2025 EAR rates from Barclays, Lloyds, HSBC, Monzo, Starling and more to find the cheapest option for your situation.
What Is an Overdraft? Arranged vs Unarranged
An overdraft is a credit facility attached to your current account that allows you to spend more money than you have. There are two types in the UK: arranged and unarranged.
An arranged overdraft (also called an authorised or planned overdraft) is one you have agreed with your bank in advance. You apply for a limit, the bank assesses your creditworthiness and sets a maximum amount, and you are charged interest only on the amount you use. An unarranged overdraft (unauthorised or unplanned) occurs when you exceed your arranged limit, or when you attempt to spend more than your balance without any agreed facility.
Before 2020, banks could charge daily fees for unarranged overdrafts that were much higher than arranged overdraft rates. Some banks charged up to £5-£8 per day for an unarranged overdraft, which could equate to thousands of percent APR. The FCA's 2020 reform abolished this practice.
How Overdraft Interest Is Calculated in the UK
Since April 2020, all UK banks must calculate overdraft interest using a simple formula based on EAR (Effective Annual Rate). The daily interest charge is:
Overdraft Daily Interest Formula
Example: £500 at 39.9% EAR = £500 x (0.399/365) = £0.547 per day
To calculate your monthly cost, simply multiply the daily charge by the number of days you are in your overdraft. Note that interest is charged on the balance each day, and in practice many banks apply interest monthly to your account, but the daily accrual method is used for transparency.
FCA 2020 Overdraft Reform: A Landmark Change
The FCA's overdraft reforms, which came into effect on 6 April 2020, fundamentally changed how UK banks charge for overdrafts. The key changes were:
- Banks must charge a single interest rate (EAR) for arranged and unarranged overdrafts
- Fixed daily or monthly fees for overdrafts were banned
- Banks can no longer charge higher rates for unarranged use than arranged use
- All overdraft costs must be expressed as an EAR percentage to make comparison straightforward
The irony of the reform is that while it eliminated punitive unarranged overdraft fees, most banks responded by raising their standard EAR rates from around 19-20% to 39.9%. The FCA acknowledged this outcome but maintained that transparency through EAR comparison is more important than holding rates at a particular level.
Why Most UK Bank Overdrafts Are 35-40% EAR
The convergence of most high street banks to 39.9% EAR is not a coincidence. Following the FCA reform, banks faced a commercial decision: they had to replace complex fee structures with a single transparent rate that covered their costs and risk. Market research suggested that 39.9% EAR was roughly equivalent in revenue terms to the previous fee structures for the average overdraft user, while being low enough to appear competitive.
This clustering around 39.9% has attracted criticism from consumer groups and the FCA itself. The regulator has noted that it expected more variation and competition in overdraft pricing and has signalled it may intervene further if the market does not self-correct.
0% Overdraft Options: Student Accounts
The best overdraft deal available in the UK is a student current account with a 0% interest-free overdraft. In 2025, the following student accounts offer interest-free overdraft buffers:
| Bank | 0% Overdraft Limit | Notes |
|---|---|---|
| Halifax Student | Up to £3,000 | Increases each year of study |
| HSBC Student | Up to £3,000 | Available from year 1 |
| NatWest Student | Up to £3,250 | Cashback offer available |
| Santander Student | Up to £2,000 | Plus 4-year railcard |
| Nationwide FlexStudent | Up to £3,000 | Increases year on year |
These accounts are exclusively available to full-time students. There is usually a grace period after graduation (typically 1-3 years) before the 0% facility is withdrawn or reduced.
Overdraft vs Credit Card: Which Is Cheaper?
For short-term borrowing, the comparison is complex. An overdraft at 39.9% EAR and a credit card at 22.9% APR both sound expensive, but the key difference is what you are paying interest on. With a credit card, if you pay in full by the statement date, you pay no interest at all. With an overdraft, interest starts accruing from day one.
However, a 0% purchase credit card (common for new customers) lets you spend now and pay off over 12-24 months with no interest. This is far cheaper than an overdraft for planned spending. For truly short-term needs (1-7 days), a small overdraft may be more convenient than a credit card, as the total interest on £200 for 5 days at 39.9% EAR is less than £1.10.
How to Reduce Your Overdraft Interest
If you regularly use your overdraft, here are actionable steps to reduce costs:
- Switch to Starling or Monzo: Both offer meaningfully lower rates than high street banks
- Set up a salary transfer: Time your salary to enter your account before bills go out to minimise overdraft days
- Create a buffer savings pot: Even £100-200 in a separate pot you can dip into avoids overdraft use
- Consider a personal loan: If you permanently live in your overdraft, a personal loan at 8-15% APR is far cheaper than 39.9% EAR
- Ask for a rate review: Some banks will negotiate with long-standing customers, particularly if you have a good repayment history
- Use the FCA's switching incentive: The Current Account Switch Service guarantees a 7-day switch, and many banks offer switching bonuses
Overdraft vs Personal Loan: Full Comparison
| Factor | Overdraft (39.9% EAR) | Personal Loan (9.9% APR) |
|---|---|---|
| Rate (typical) | 35-39.9% EAR | 5.9-15% APR |
| £1,000 for 3 months cost | ~£100 | ~£25 |
| Flexibility | High (use as needed) | Fixed repayments |
| Repayment schedule | None required | Monthly fixed payments |
| Credit impact | Moderate | Moderate |
| Best for | Short-term (1-7 days) | 1 month or longer |
BNPL vs Overdraft: Emerging Alternatives
Buy Now Pay Later (BNPL) services such as Klarna, Clearpay and Laybuy offer interest-free instalment plans for purchases. For eligible retail spending, BNPL is strictly cheaper than an overdraft. However, BNPL is restricted to specific retailers, is not designed for cash needs, and from 2025 onwards is being brought under FCA regulation requiring credit checks and affordability assessments.
UK Consumer Debt Statistics
According to the Bank of England and FCA data, approximately 26% of UK adults used an arranged overdraft at least once in the previous 12 months. Total outstanding overdraft debt in the UK is approximately £5-6 billion. The average arranged overdraft limit is £1,200, while the average amount actually used is around £300-400. Low-income consumers are disproportionately affected, with those in financial difficulty often relying on overdrafts as a long-term credit facility at very high rates.