Guide · 4 minute read · Updated 10 Jul 2026

How much does an overdraft really cost?

More than most people think. Since 2020, overdrafts run on a single interest rate, and for most big banks that rate is around 39.9% EAR, which is dearer than a typical credit card. The hidden cost is the persistent overdraft you never quite clear.

One rate now, arranged or not

Until April 2020, overdrafts were a mess of daily fees and punishing unarranged charges. The FCA swept that away. Banks must now charge a single, simple annual interest rate (an EAR) on all overdraft borrowing, with no fixed daily or monthly fees, and crucially the rate for going over an agreed limit cannot be higher than the rate for staying within it.

Most major banks landed on the same headline figure of 39.9% EAR. That single rate made overdrafts easier to compare, but it also revealed how expensive they had quietly been. EAR (equivalent annual rate) is the cost of the borrowing itself; it does not include any separate account fee your bank might charge for a packaged current account.

What it costs in pounds

Interest is charged only on what you are overdrawn and only for the days you are overdrawn, which is the one saving grace. At 39.9% EAR, being £500 into your overdraft costs roughly £500 x 0.399 / 365, about 55p a day, or around £16.40 over a month.

That sounds small until it never ends. Sit £500 overdrawn for a full year and you pay close to £200 in interest for the privilege of being £500 short, every month, without the debt shrinking at all. A £1,000 persistent overdraft at the same rate costs roughly £33 a month, near £400 a year. The debt payoff planner shows how fast a fixed monthly overpayment would clear it.

How it compares to cards and loans

Ranked by cost, an arranged overdraft at 39.9% is usually one of the more expensive ways to borrow. A typical credit card sits around 24% APR, cheaper than the overdraft, and a personal loan for a few thousand pounds can be far cheaper still, often in the single digits to low teens for borrowers with decent credit.

So the ordering, roughly, is: a 0% purchase or balance transfer card is cheapest if you qualify, then a personal loan, then a standard credit card, then the overdraft, with only payday-style lending above it. The overdraft's real advantage is not price but flexibility: it is there instantly and you only pay for the days you use it. For a one-night dip that is fine; for a permanent buffer it is the wrong tool.

Getting out of a persistent overdraft

If you live in your overdraft month to month, the account never recovers, because payday clears it and spending drags you back under within days. Banks have to identify customers stuck like this and offer help, so it is worth asking yours directly.

The cheapest fix is usually to move the balance somewhere that charges less. A money-transfer credit card can pay cash into your account to clear the overdraft, swapping 39.9% for 0% over a fixed window (for a fee), or a low-rate personal loan can refinance it into fixed, shrinking payments. Failing that, treat the overdraft as a debt with a target: build even a small buffer with the budget planner so payday no longer starts below zero, then chip the limit down month by month.

Common questions

What is a typical overdraft interest rate in the UK?

Since the 2020 rules, overdrafts use a single EAR (equivalent annual rate), and most major banks charge around 39.9% EAR. That applies to both arranged and unarranged use, since a bank cannot charge more for going over your agreed limit than for staying within it.

How much does a £500 overdraft cost per month?

At 39.9% EAR, being £500 overdrawn costs about 55p a day, roughly £16.40 over a month, or close to £200 a year if you stay there. Interest is only charged on the amount you are overdrawn and only for the days you are overdrawn.

Is an overdraft cheaper than a credit card?

Usually no. A typical arranged overdraft at 39.9% EAR is more expensive than a standard credit card at around 24% APR, and far dearer than a personal loan. An overdraft's advantage is flexibility for short dips, not a low price for ongoing borrowing.

How do I get out of a persistent overdraft?

Move the balance somewhere cheaper: a money-transfer card can clear it at 0% for a fixed window (for a fee), or a low-rate personal loan can refinance it into fixed payments. Otherwise build a small buffer so payday no longer starts below zero, then reduce the limit step by step. Ask your bank for help, as they must support customers stuck in one.

Guidance and education, not regulated financial advice.