Your Money: The unspeakable cost of unauthorised overdrafts

It's expensive being in debt, particularly if the borrowing is via an unauthorised overdraft. But while slipping into the red on occasion, before you realise or have cleared it with your bank, is easily done, consumers pay a heavy price for it. As well as interest rates on unauthorised overdrafts ranging from 6.9 per cent (Alliance & Leicester) to an eye-watering 33.7 per cent (Royal Bank of Scotland), there is a host of fees and charges to contend with.

It's expensive being in debt, particularly if the borrowing is via an unauthorised overdraft. But while slipping into the red on occasion, before you realise or have cleared it with your bank, is easily done, consumers pay a heavy price for it. As well as interest rates on unauthorised overdrafts ranging from 6.9 per cent (Alliance & Leicester) to an eye-watering 33.7 per cent (Royal Bank of Scotland), there is a host of fees and charges to contend with.

Many banks levy a monthly fee on unauthorised overdrafts, which can be as high as £28 (HBOS). And if your bank continues to pay standing orders or direct debits - even though this takes you above your agreed overdraft - you will also be charged a separate fee each time. This ranges from £18 (HSBC) to £25 (Alliance & Leicester and NatWest).

If one of your payments bounces, charges are higher still: from £27.50 (Nationwide, increasing to £28.50 from June) to £32 (Abbey).

Customers need to be on their toes and pay attention to increases in charges. Nationwide building society is the latest provider to raise the stakes: as well as increasing the charge on bounced payments, it is raising th efee for going overdrawn without out authorisation on its FlexAccount from £12 to £15 on 1 June.

Nationwide argues that it is doing this to encourage customers to use their accounts correctly and deter them from going overdrawn without authorisation. It also points out that it has the lowest authorised overdraft rate on the market - 6.75 per cent.

However, there is no need to pay a monthly charge for an unauthorised overdraft. Abbey is scrapping its £15 charge from 7 April. And Barclays, HSBC and Lloyds TSB, which are often criticised for high fees, don't impose a monthly charge.

Before we get too carried away, though, these providers let themselves (and their customers) down with their unauthorised borrowing rates: 27.5 and 29.8 per cent for Barclays and Lloyds TSB respectively, and a slightly better 14.8 per cent from HSBC. (Nationwide charges 23.9 per cent on unauthorised overdrafts, again at the top end of the scale.)

Abbey is trying to shake off its "shabby" tag by being more flexible. If customers slip into an unauthorised overdraft, the first paid or bounced charge is refunded if they have incurred no other charges in the previous six months. If the item doesn't take the customer more than £50 over the agreed overdraft limit, the item will be paid anyway.

Although unauthorised borrowing can be prohibitively expensive, the situation isn't quite as bad as it used to be. Most banks used to charge customers £15 to £20 for sending out a letter informing them of their unauthorised borrowing.

Thankfully, the majority have done away with this; it used to prove very expensive for some of the most vulnerable customers. For example, one Independent on Sunday reader, who is self-employed with a young family, found it difficult to budget and quite often ended up overdrawn. Not only did he have to pay extortionate rates of interest, he had to cough up £20 a time for the letter from his bank telling him what he already knew.

He couldn't help over-spending now and again but was never in the red for long. And although he wasn't happy to pay such high rates of interest, he accepted that this was fair enough.

What he did object to was paying for the letters. But the bank said it couldn't stop sending them because every time he went overdrawn, the computer automatically sent one out. The only way round it was to get an authorised overdraft, but he didn't want to be tempted to increase his spending. Fed up, he switched banks.

And that's what we all should do if we aren't satisfied. Make sure you have an authorised overdraft if you are likely to slip into the red as you pay less interest and will avoid extra charges and fees.

If you overspend by just a couple of hundred pounds each month, opt for an account with a £250 fee-free buffer, such as Cahoot's.

And keep an eye on your statements to see whether you have incurred extra charges.

m.bien@independent.co.uk