Lloyds to end unplanned overdraft charges

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From November, customers of Lloyds, Halifax and Bank of Scotland who spend beyond their planned overdraft limit won't face any daily fees or returned item charges, although they may be prevented from making further payments from their account until the overdraft is cleared.

Added to this, the fees surrounding planned overdrafts will also be reformed, with fees for missed payments being abolished, and with the introduction a single rate of 1p for every £7 of authorised overdraft a customer uses.

But while this benefit up to nine out of 10 Lloyds customers, according to the bank, there will be a small minority who'll see their overdraft charges increased as a result.

Unplanned overdrafts

Currently, Lloyds charge a flat rate of £10 for any of their current account holders who try to make a purchase above £10 but lack the sufficient funds.

Added to this, they charge daily fees for customers who remain in an unplanned overdraft. For example, if an unauthorised overdraft balance is between £10 and £25, they'll charge £5 pound for every day this remains the case, although only for a maximum of eight days in every monthly billing period.

Likewise, if a customer's unplanned overdraft balance is £25 or greater, they'll have to pay £10 a day for a maximum of eight days a month. And as with overdrafts between £10 and £25, there will also be a £6 monthly charge to cover.

These charges were implemented following Lloyds' last major overdraft shakeup, back in 2010, but from November they will be no more.

Although Lloyds don't provide a direct comparison, they state that a customer who enters a planned overdraft of £100 for 10 days - and also enters an unplanned overdraft of £50 for two of those days - will have to pay only £1.40 from that month. This is in contrast to the £18 they'd have to pay now.

Given that this is a considerable saving, Lloyds have unsurprisingly been quick to toot their own horn.

Their director of customer products and marketing, Vim Maru, said the following, "This new approach is simple and clear ... When asked about our new approach, over 80% of customers said that they preferred it compared to the current charging format".

Planned overdrafts

Things are therefore looking up for any Lloyds customer who's likely to enter an unauthorised overdraft in the near future.

Yet according to the Bank, things will also improve for users of authorised overdrafts.

At the moment, they pay an interest rate of 19.89% EAR (equivalent annual rate), as well as the same monthly fee of £6.

This monthly charge will be ended from November, which will come as good news to many customers. That said, the equivalent annual interest rate will rise, from 19.89% to the more eye-catching 68.4%.

This is a steep rise, and in certain cases it will mean that customers will end up paying more than they would have previously.

For instance, someone borrowing £100 on an authorised overdraft would pay approximately £1.14 in interest if the balance went unpaid for a whole month, in addition to the £6 monthly fee.

In November, they'd have to pay £3.33 in interest, although since they wouldn't have to pay any monthly fee, it would work out cheaper for them overall.

However, this is assuming that they stick to a smaller overdraft amount such as £100. If they borrow £500, by contrast, then in a month they'd owe £21.08 in interest, in contrast to the £13.24 (including the £6 flat fee) they'd have to pay at the moment.

FCA investigations

As such, those who are likely to borrow larger amounts on a planned overdraft may be better off looking elsewhere, since they will essentially be financing a portion of the savings being enjoyed by other Lloyds customers.

Yet for those others, Lloyds' overhaul comes as very welcome news, especially in contrast to certain other overdraft overhauls in recent years, such as Barclays' controversial changes in 2014.

It also serves as a necessary step in curbing the excessive charges currently faced by many people on unplanned overdrafts, which have been under fire from MPs in recent months and years for being too expensive.

It's possible, however, that in simplifying and abolishing certain overdraft fees, Lloyds may be attempting to deprive the Financial Conduct Authority of any rationale for imposing an industry-wide cap on them, a measure which the authority is currently investigating.

The bank are perhaps trying to prove they can keep these charges under control themselves, and while their announcement demonstrates this to a certain extent, it shows that voluntary control of overdraft charges won't be entirely without pain for some customers.