Draft dodging: Overdrafts can be punitively expensive
Overdrafts may be a quick and easy way to manage your current account whenever cash-flow is tight, but they can also be punitively expensive so are best avoided, writes John Cradden
BANK overdrafts are a convenient and simple way to manage erratic cash flows or deal with an unexpected bill or payment.
Unlike other loans, you don't have to pay it back over a certain period. As long as your bank goes along with it, it can be an almost permanent feature of your banking.
In 2008, households in Ireland were borrowing as much as €3.1bn in bank overdrafts, according to Central Bank figures. This has dropped off quite a bit since then, falling to just over €2.7bn last year.
But the cost of relying on them or taking them for granted is very high. Along with credit cards, overdrafts rank as one of the worst types of banking products in terms of value.
We also have some of the highest overdraft rates in Europe. A recent survey for the European Commission found that Irish current accounts were less transparent than the European average, with more complex pricing structures.
What's more, banks have been putting even more pressure on borrowing costs for ordinary consumers across a range of products including overdrafts, loans and credit cards.
According to the National Consumer Agency's personal finance website, itsyourmoney.ie, Permanent TSB (PTSB) holds the title of worst bank for overdraft charges, with a whopping interest rate of 16.3pc (annual percentage rate or APR) on authorised overdrafts.
This is a hike of nearly three percentage points on a previous rate of 13.6pc APR from earlier this year, and which used to be one of the lower rates available.
Not too far behind are AIB and Bank of Ireland, with 14.79pc and 14.8pc respectively, and Ulster Bank with a rate of 14.55pc.
This leaves National Irish Bank (NIB) with by far the best overdraft rate of 11.43pc and 10.62pc and on its Easy and Easy Plus current account packages, respectively. But the charges really begin to mount if you find yourself breaching your overdraft limit.
Banks will charge what is called a "surcharge" interest rate, which is basically another interest charge on top of the interest already being charged for the overdraft facility.
So if you breach an overdraft limit, Permanent TSB will charge you another 12pc APR interest on the excess amount.
For example, if you have an overdraft facility of €500 and you spend €700, the €200 over the limit will be charged at 16.3pc plus 12pc -- or 28.3pc.
AIB also applies a 12pc surcharge interest for unauthorised overdrafts, while Ulster Bank and NIB charge 9pc and Bank of Ireland 7.2pc.
As well as applying surcharge interest, banks will also charge a "referral fee" for each payment exiting your account that sends it over the overdraft limit, but which the bank honours even though you don't have enough money.
These charges vary from bank to bank. AIB charges €5.15 per item, PTSB charges €5, and Ulster Bank €4.44.
Bank of Ireland waives the referral fee for the first item per quarter, but any items after that will be subjected to charges ranging from €3.50 to €10 per quarter.
NIB doesn't charge referral fees at all. But if the bank decides to return unpaid a cheque, standing order or direct debit presented for payment on your account because of lack of funds it will all incur an administration fee ranging from €10 to €12.70 per item.
Of course, as the banks are keen to point out, all these charges are entirely avoidable as long as you monitor your account carefully.
Some banks will, however, also charge you an annual fee for the privilege of having an overdraft facility in the first place.
AIB charges €25.39 to set-up an overdraft facility and the same sum if you decide to renew it, while Bank of Ireland charges €25 and PTSB €20. Ulster Bank and NIB have no set-up or renewal charges.
As well as having the lowest interest rate, NIB doesn't charge referral fees or set-up fees, making it by far the best bank for overdrafts.
Of course, the ideal situation would be not to need one in the first place.
Besides the punitive interest, fees and charges that come with them, part of the difficulty with overdraft facilities is that the longer you have them the more inclined you might be to look at your overdraft limit as your spending or budget limit.
This is particularly true if you use internet banking.
Say you have €500 in your current account, but you have an €1,000 overdraft facility, you will see two figures when you log-in to your account.
That is, one figure will read €500 and the other will read €1,500.
Breaching your overdraft limit could also hit your credit rating.
So it's time to break the habit (see panel) and leave overdraft city behind.