Comparing options
Short-term loan vs credit card
Which costs less? When the 0% card wins and when a personal loan is the smarter choice — with a worked example using the same amount and term.
7 min read → Everyday banking
Overdrafts
Explained
Arranged, unarranged, and how they are really priced since the rules changed in 2020 — plus how to work out whether an overdraft or a loan is the cheaper way to cover a shortfall.
5 min read • Cash Train editorial team
What an overdraft actually is
An overdraft lets you keep spending from your current account after the balance hits zero, effectively borrowing from the bank until your next pay lands. It is one of the most common forms of borrowing in the UK — and one of the most misunderstood.
Because it sits inside your everyday account, it can feel invisible. But it is credit, it charges interest, and it comes in two very different forms.
Arranged vs unarranged
Arranged overdraft
A limit your bank agrees with you in advance — say £500. You can drop below zero up to that figure. Interest applies, but the facility is expected and payments will normally clear.
Unarranged overdraft
When you go past the agreed limit, or overdraw with no arrangement at all. The bank may let the payment through and charge interest, or refuse it — which can trigger returned-payment problems with whoever you were paying.
The single most useful thing you can do is know your arranged limit and stay inside it. Ask your bank or check your app.
How overdrafts are charged since 2020
In April 2020 the Financial Conduct Authority reformed overdraft pricing. The old world of fixed daily fees and separate unarranged charges was swept away. The rules now require:
A single interest rate
Overdrafts must be priced as one simple annual rate (shown as an APR or EAR), the same for arranged and unarranged use.
No daily or monthly usage fees
Banks can no longer charge a flat fee per day or per month simply for being overdrawn.
Fairness on refused payments
Charges for refused payments must reasonably reflect the bank's costs, not act as a penalty.
Clearer comparison
A single rate means you can compare one bank's overdraft against another's — and against a loan.
Most major banks landed on a rate of roughly 35%–40% EAR after the reforms. Interest is charged only on what you are overdrawn, only for the days you are overdrawn.
Overdraft or loan? A worked comparison
The right choice depends on how long you need to borrow. An overdraft charges interest per day, which is brilliant for short shortfalls and expensive for long ones. Here is the same £400 borrowed two ways.
Worked example (indicative)
£400 overdraft for 10 days @ 39.9% EAR
about £4 interest
£400 overdraft left out for 3 months
about £39 interest
£400 instalment loan over 3 months
fixed, known total
Illustrative only. Overdraft interest accrues daily on the balance; a fixed-term loan gives you a set monthly payment and a clear end date. Compare the total cost in pounds, not the headline rate.
Rule of thumb: a few days at the end of the month, an arranged overdraft usually wins. A larger, planned cost spread over months, a fixed-term loan usually costs less and stops you drifting into permanent overdraft debt.
Getting out of a permanent overdraft
Living permanently in your overdraft — never quite getting back to zero before the next month starts — is a quiet, expensive habit. These steps break it:
Measure the real cost
Check your statement for the monthly interest figure. Seeing it in pounds is usually the motivation to act.
Shrink the balance in steps
Reduce your arranged limit by a small amount each month. A limit you cannot exceed is a limit you slowly repay.
Consider a fixed-term switch
Moving a persistent overdraft onto a fixed-term loan converts an open-ended, daily-charged debt into a payment that actually ends.
Ask your bank for help
If the overdraft has become unmanageable, banks must treat you fairly. Ask about a repayment plan or interest freeze before it grows.
If debt feels out of control, free help is available from StepChange and MoneyHelper.
Related guides
Related guides
← All guides
Common questions
FAQ
An arranged overdraft is a borrowing limit your bank agrees in advance — you can spend below zero up to that limit. An unarranged overdraft happens when you go beyond that agreed limit, or overdraw with no arrangement at all. Since April 2020 the Financial Conduct Authority requires banks to charge a single interest rate on both, so unarranged borrowing can no longer carry the punitive fixed daily fees it once did — but banks can still refuse the payment.
Since the FCA reforms of April 2020, overdrafts must be priced as a single annual interest rate (an APR/EAR) with no daily or monthly usage fees. Most high-street banks settled around 35% to 40% EAR. Interest is charged only on the amount you are overdrawn and only for the days you use it, so a small overdraft cleared quickly costs very little.
It depends on how long you borrow for. For a few days at the end of the month, an arranged overdraft is often the cheapest option because you pay interest only for those days. For a larger, planned expense repaid over several months, a fixed-term instalment loan usually costs less overall and, unlike an open-ended overdraft, has a clear end date. Always compare the total pounds-and-pence cost, not just the headline rate.
Yes. An arranged overdraft appears on your credit file as a form of revolving credit, and consistently sitting near your limit can look like reliance on credit. Being pushed into an unarranged overdraft, or having payments bounced, can be recorded and may concern future lenders. Using a small part of an arranged overdraft occasionally and clearing it is not a problem.
A fixed-term loan gives your borrowing an end date.
Cash Train shows the total repayable before you commit — no daily-drip interest, no surprises. Apply in minutes.
Apply now →