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What Happens If I Can’t Pay My Overdraft in The UK?

Written by, Marija Petkova

Updated August, 8, 2022

An overdraft can be an excellent short-term solution in an emergency.

But, if you use it as more than just an occasional buffer, you might find yourself in a situation where you can’t get out of your overdraft.

So, what happens if I can’t pay my overdraft in the UK exactly and how can you pay off your debt? 

Let’s dive in.

What Is An Overdraft?

An overdraft is essentially a loan.

It lets you borrow money from the bank through your current account, by taking out more money than you have on your balance

Did you know? Over a third of small and medium-sized enterprises in the UK took out an overdraft via a bank.

Once you withdraw more cash from your account than what you have, you go ‘overdrawn’.

For example, if you only have £10 in your bank account, but you take out £30, your balance will fall to – £20, which is how much you’ll owe the bank, plus interest.

How Does an Overdraft Work?

There are two types of overdraft: arrangement and unarranged. 

Arranged overdraft 

An overdraft arrangement involves entering into an agreement with your bank to set a limit on how much money you can spend over your account balance. This means that you can ask the bank to limit your overdrafts to £100 and you won’t be able to take out more than that amount. 

This is ideal in cases where you occasionally need money to cover some short-term expenses, such as unexpected bills.

When setting a limit, the amount of overdraft that you can borrow usually depends on your credit score, salary, and outgoings. Most banks set up arranged overdrafts for free but there are some, especially business bank accounts, that charge an arrangement fee.

Unarranged overdraft 

An unarranged overdraft is when you go over the balance without previously arranging an overdraft limit. This also includes exceeding your existing overdraft limit.

If you don’t have an overdraft arrangement, the bank will ask you to pay back what you owe instantly.

What Happens If I Can’t Pay My Overdraft?

If you can’t pay back the amount you’ve overdrawn, the amount you’ve borrowed will continue to accrue interest and your debt will grow.

Failure to pay back your debt will hurt your credit score. It will be recorded on your credit file and stay there for years. 

If your debt keeps piling on, the bank can declare your account as default and freeze your credit and debit cards. The bank can also take legal action against you to recover the debt, which can result in a County Court Judgment (CCJ)

If you’re struggling to pay back what you owe, you can contact your bank and building society. The Banking Code commits all lenders to look at your situation sympathetically. 

They can offer to:

  • Reduce or waive the interest for a period.
  • Transfer the amount you owe to a loan where you can repay the debt at a reduced interest rate.
  • Set up a repayment plan.

If none of those options work for you, you can contact a debt charity that can help you figure out your next move.

How Much Do You Get Charged For an Overdraft?

In April 2020, the FCA ruled that the only way banks can charge for overdraft is by applying a simple annual interest rate (APR).

They can no longer charge overdraft fees, late fees, or daily fees for unarranged overdrafts, and they cannot apply different interest rates for unarranged or arranged overdrafts. 

One way that banks have tried to make up for not being able to charge fees is by increasing the interest rate. 

Interest rates from banks and building societies for their overdraft facilities now range between 19% and 40% or more. Banks like Santander, Halifax, and HSBC have a 39.9% interest rate on overdrafts.

This can work out to be quite expensive. 

For example, if you use £1000 on your arranged overdraft for 10 days with a 39.9%, you’ll pay a £9.33 interest.

If you need access to quick cash, you might want to consider other types of loan products, like payday loans.

Does an Overdraft Affect Your Credit Score?

An overdraft shouldn’t affect your credit score if it was arranged, so long as you avoid exceeding the set limits. 

Overdrafts can lower your credit score only if they remain unpaid for longer periods. When overdraft services are used sensibly, they could improve your credit score. 

Can’t Get Out Of My Overdraft: How To Pay Off An Overdraft

‘My bank account is overdrawn and I have no money.’

If this statement is true for you, and you need to clear your overdraft, you can do that with:

A 0% balance transfer credit card

Taking out a 0% balance credit card to clear out the overdraft from your current account can help you pay off your debt quickly. These cards have an introductory interest-free period of up to 2 years. 

A low-rate personal loan

If you can find a personal loan with a low interest rate and affordable terms, you can use it to pay your overdraft debt. If you’re looking to get a loan with bad credit, here’s our list of the best bad credit lenders and what they have to offer.

A cheaper provider

Banks are always eager to gain new customers. Some banks offer free cash or interest-free periods for making an account with them.

Your savings

If you have some money stashed away, it may be wise to use it to clear your debt. Since overdrafts come with high interest rates, you will be better off paying them faster. 

Can You Pay Off Your Overdraft In Installments?

Unlike loans, setting up an overdraft agreement doesn’t include a repayment plan.

Whether you decide to pay up the entire lump sum in one go or spread your payments with regular monthly installments – it’s entirely up to you. 

Bottom Line

An overdraft is a service available to bank account holders that lets them borrow money by going over their account balance. They’re ideal for covering emergency expenses, but they have to be paid as quickly as possible, especially if they’re not arranged, because they come with high interest rates.

Frequently Asked Questions And Their Answers

How long do you have to pay an overdraft back?

Overdrafts don’t come with end dates and you can pay them back whenever you can. It’s best to pay what you owe as soon as you can because the amount will continue to accrue interest.

Is an overdraft a loan?

An overdraft is a  type of loan that you borrow from your bank.

Can you go over your overdraft limit?

Most banks won’t allow you to go over your overdraft limit.

Can my overdraft be written off?

Since an overdraft is a form of debt, it can be written off through insolvency solutions, such as an IVA or bankruptcy.

What happens if I can’t pay my overdraft in the UK?

The longer your debt goes unpaid, the more interest it will accrue. On top of that, your bank can default your bank account, freeze your card, and even take legal action against you.

My name is Marija, and I'm a financial writer at DontDisappointMe. Although finance might not be everyone's cup of tea, my 10+ years of working in one of the biggest banks in my country, and my interest in extensive research on everything finance/investment-related, have made me somewhat of an expert in the field (if I do say so myself). No longer having the passion to work in a corporate setting, I decided that I couldn't let all of this knowledge go to waste so I started writing. And, here I am! Today I try to share my knowledge with my audience in the hopes of making this topic as simple and interesting as possible. In my leisure time, I like spending time with my family and travelling to new locations.