Personal Loan Debt Replaces Overdraft Fees in the UK

Overdraft notice
Personal loans and credit card debt is now being replaced by overdraft fee debt in the UK. According to national debt charity Consumer Credit Counselling Service (CCCS), overall debt levels are declining while overdraft debt has increased.

The number of people seeking assistance from the CCCS has increased from 58,069 in 2007 to 134,540 in 2011, according to the released report. UK residents aged 25 to 40 increased their overdraft debt by £139 (average of $222) and totaled £1,824 (average of $2,914) in debt since 2007. Residents aged 41 to 59, increased their overdraft debt by £407 (average of $650) and totaled £2,345 (average of $3,746) in debt during the same period.

An overdraft fee is caused when money is withdrawn from a bank account and the balance goes below zero, or a predetermined base number. Many banks will charge an overdraft fee ranging from $10 to $38. Overdraft debt is a compilation of these minor fees into a larger, more significant, number.

Although one form of debt is increasing, another form is reported to be decreasing. Research from the British Bankers Association (BBA) found that consumers are less likely to take out personal loans than they were five years ago. The money borrowed in loans and overdrafts in August was surpassed by the amount repaid by £351 million (average of $560.8 million). BBA statistics director David Dooks said weak trading conditions persist, which is impacting borrower’s perceptions.

“People are acting conservatively in this weak economic environment, maintaining debt repayments and building up deposits,” Dooks said in a press release. He continued stating that unsecured borrowing, such as personal loans, continues to remain subdued.  

Even though a reduction in one form of debt is a positive factor, it can skew how borrowers perceive other forms of debt. The CCCS said people tend to view overdraft debt different as other forms of debt, such as personal loans and credit cards. Delroy Corinaldi, CCCS external affairs director, said that many of their clients do not add the fees into their debt calculations.

“The problem with this is that it makes it easier for them to use their overdraft for day-to-day expenses, temporarily masking any problems they may have to make ends meet,” Corinaldi said. “This is not sustainable, which is why rising numbers of people are struggling with the rising amounts they owe on their overdraft.”

While some small overdraft fees might assist borrowers in rare occasions, the cost of the fees will usually overshadow the need. Other loan methods such as personal loans and credit cards are a more suitable option in these cases. The interest rates on both of these options can be high, but paying $38 for one charge can add up to staggering numbers in a short period of time. The CCCS said the rise in overdraft debt could be due to a decrease in available funding in the forms of credit cards and personal loans. The agency said many people use overdrafts to fill in the gaps in “buckling household budgets.”

“It is important that people look at how they are using their overdrafts and seek help if they have concerns about how they will repay it,” the CCCS said.