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Lloyds, Halifax and Bank of Scotland to charge up to 49.9% overdraft fees

Kalila Sangster
LONDON, UNITED KINGDOM - 2019/12/04: A man using Lloyds Bank's ATM machine in London's West End. (Photo by Dinendra Haria/SOPA Images/LightRocket via Getty Images)
Lloyds Banking Group’s 49.9% overdraft interest rate is the highest announced to date, following changes demanded last year by the City regulator. Photo: Dinendra Haria/SOPA Images/LightRocket via Getty Images

Lloyds, Halifax, and Bank of Scotland customers will be charged overdraft interest rates of up to 49.9% from April.

Lloyds Banking Group (LLOY.L), which owns all three brands, will implement a “risk pricing” structure which means that some customers will be charged higher rates of as much as 49.9%.

The majority of the banking giant’s two million current account customers will receive new annual rates of 39.9%. But it will look at customers’ credit history to decide which rate to offer ⁠— meaning those with a poor credit history are likely to pay the most.

The group is the latest bank to make changes to its overdraft costs following a ban on excessive fees by the Financial Conduct Authority (FCA) to combat a “dysfunctional” overdraft market. The new rules will come into force on 6 April.

The rules prevent banks charging more for unarranged overdrafts than arranged ones, banning fixed daily or monthly fees. Instead banks have to charge for overdrafts using a single annual interest rate.

Lloyds Banking Group’s 49.9% overdraft interest rate is the highest announced to date, with many banks, including Nationwide (NBS.L), HSBC (HSBA.L), and Santander (BNC.L), setting their new rates just below 40%.

READ MORE: Why your bank balance may drop today as overdraft rules change

But the group said 90% of its customers with an overdraft will pay less under the new model. For the minority of customers who will pay more, the average monthly increase will be £1.89 ($2.48), according to the bank.

Giving an example of the difference in borrowing costs between lower and higher price points, the bank said customers borrowing £500 over a week will pay £3.22 at 39.9% and £3.85 for 49.9% ⁠— a difference of 63p.

A Lloyds Banking Group spokesman said: “We are writing to our customers to explain the new overdraft rates that will apply from April 2020.

“As a result of these changes, 90% of customers with an overdraft will pay less than they do today.

“The majority of customers will pay the APR of 39.9% on most of our current accounts, 27.5% on our Club Lloyds account.

“Customers will be offered a personalised overdraft rate, up to 49.9%, depending on their circumstances.

“We have not charged unarranged overdraft fees or returned item fees since 2017, and this will not change ⁠— we know this simple approach is valued by our customers.”

READ MORE: Monzo and Starling raise interest rates on overdrafts

Christopher Woolard, executive director of strategy and competition at the FCA, said: “Our changes expose the true cost of an overdraft.

“We have eliminated high prices for unarranged overdrafts. This will result in a fairer distribution of charges, helping vulnerable consumers, who were disproportionately hit by high unarranged overdraft charges, and many people who use their overdraft from time to time.

“Seven out of 10 overdraft users will be better off or see no change.”