The bank deal that makes 5,000% APR payday loans look cheap

Payday loans at 5,000% APR rightly shock many people. Yet high street banks have a product so expensive many would save by taking a payday loan, even at ridiculously high rates, instead. But as banks needn’t phrase it as an APR, they get to offer this product without the nasty brand damage.

As for what this extortionate charge is – well it’s simple, common and famous. It’s a bank charge for going beyond your pre-agreed overdraft limit.

How expensive are bank charges in comparison?

Clydesdale Bank charges £25 per day for going beyond your limit. I tried to calculate this in Excel as an APR, based on someone getting a £25 charge a day for being £1 over. The resultant interest rate was TOO LARGE FOR EXCEL TO CALCUATE % APR – which means it’s a ‘figure with way more than 300 zeros after it’ percent.  

So I had to take more standard charges like Nationwide’s £15 per item or Lloyds £5-10 per day depending on how overdrawn you are (see the Bank charges comparison guide for more). 

But even here, if you got a charge for being £1 over, it was too large to calculate so I went for the following scenario…

Go £5 over your overdraft at Lloyds and get charged £5. Based on payday loan calculation rules this would be roughly: 7,500,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000% APR.

Or, to put it another way – compare the above costs to borrowing a range of amounts at an APR of 5,000%:

As you can see, in comparison 5,000% APR is cheap.

So should everyone get payday loans to avoid bank charges?

Payday loans are a blight on society. The rates above rely on you only borrowing for a day – in reality that doesn’t happen with payday loans, they’re designed to be had for a week or a month, so you pay an upfront admin hit anyway. 

While some could save by using a payday loan instead of getting hit by bank charges, (though not every time) what’s far better is to avoid the borrowing all together or use a host of other solutions (we’ve a full ‘what to do instead of getting payday loans’ guide coming soon).

Even expensive credit cards, often rightly thought of as bad guys, compared to payday loans or bank charges are relatively cheap. The problem with them though is the easy availability of credit which means the debts can snowball.

Banks have cleverly avoided having to phrase their charges in a nasty way

My real point here is the fact that we don’t have any form of playing field to compare. Payday loans must list themselves as APRs due to regulations – that’s not a particularly sensible system in my view (see the evidence given to the Business Select Committee to explain why) but at least it scares people off. Yet banks get away with levying relatively higher charges without the stigma.  

Just image if Clydesdale had to write ‘Bank Charges APR too high to calculate’, or many others had to write ’7,500,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000% APR’. 

It wouldn’t exactly be good for their brand (and just think of the extra cost of advertising just to fit the figure in).

Are people going beyond their limit just taking cash that isn’t theirs?

This is an old chestnut whenever I talk about bank charges – and it’s nonsense. Banks have three limits within overdrafts:

• The authorised overdraft – ie, no bank charges.
• The unauthorised, paid overdraft – ie, there will be bank charges, but your cheques/DDs don’t bounce.
• The unauthorised, unpaid overdraft – ie, there will be bank charges and your cheques/DDs do bounce.

These are just functions of a bank account – the banks don’t have to have a ‘paid’ overdraft, it was introduced to increase profitability and added over £3 billion a year to their coffers. Of course during the bank charges reclaiming height over a billion was paid back – and still now a few whose charges cause hardship can get some cash back. Yet overall it’s still immensely profitable.

Ps. Nerdy calculation note. Of course the APR calculation assumes that the charge would compound, which it doesn’t with bank charges – so the APR given is a farce. Yet it doesn’t with some payday lenders either – who don’t compound and cap the time – yet they must use the APR calculations that assume they do.

So I’m simply giving banks similar treatment in my calculations. What we need is a sensible clear measure for all – which is what I and many others have lobbied for.)

Related Past Blogs

• Payday loans, the evidence: why we need regulation now…
• Best-buy payday loans – should MSE include them?
• Can you use payday loans to boost your credit rating?
• Fact: borrowing £100 at Wonga’s APR costs more than the US national debt (over $14 trillion) after 7 years!
• Don’t tell MPs I’m against payday loan regulation!
• MP says don’t cap interest rates, cap loan costs
• Should we worry more about 10% interest than 2000% APR loans?