How to pay less for being in the red

UNAUTHORISED overdrafts are one of the banes of modern banking. A two-week unauthorised overdraft of £400 at NatWest costs £63.18. Leave it for another two weeks, and you're looking at £117.37. Add in a couple of bounced cheques at £27.50 each, and total charges are getting on for half the original sum borrowed.

A spokeswoman for Lloyds Bank conceded that if the overdraft was short- lived and unintentional, charges might be excused - for example with an extraordinary late salary payment, or debt worth only a few pence. "We're far more likely to be sympathetic if we're warned in advance,'' she said.

Geoff Seymour, at Alliance & Leicester, also said customers should be specially alert if a "tight finish'' was foreseeable at the end of the month, because debits were likely to be subtracted from the account on the same day - before credits were added. But the lender may waive charges if given adequate notice.

If this is a regular occurrence, the Co-operative Bank offers a three- day free overdraft facility to all clients.

For people who end up with unauthorised overdrafts unawares, Norwich & Peterborough Building Society's Gold Current Account provides a £500 buffer zone, where overdrafts not exceeding this amount are automatically permitted. First Direct has a similar arrangement, up to a maximum of £250.

Best interest rates charged on authorised overdrafts are currently offered by Abbey National, Alliance & Leicester (Alliance account) and Woolwich Building Societies. None of these have quarterly or monthly, or arrangement fees. Overdraft interest charges are usually levied on a per-day rate. Arrangement fees are one-offs.

People needing to borrow larger amounts, for longer periods, should consider taking out a personal loan. Unsecured loans are charged at a fixed rate of interest, which helps to budget for repayments. The term - typically one to five years - is agreed in advance. This is more secure than an overdraft, which in theory can be called in at any time. Loans are less flexible than overdrafts, as they apply for a fixed period. Whereas overdrafts can be cleared overnight, early redemption of an unsecured loan may have penalties attached. Some companies demand interest for the full original duration. Unsecured loans are often cheaper than overdrafts, and secured loans backed by property cheaper still.

It is worth shopping around to find the best rates. Some providers only lend to existing customers - these include First Direct, Bank of Scotland's Banking Direct, Halifax and the Woolwich Building Societies. Others, such as Royal Bank of Scotland and Nationwide Building Society, offer preferential rates to current customers.

Smaller sums are more expensive. Barclays charges 21.9 per cent APR on £500 loans, but only 16.9 per cent for amounts over £5,000. Bank of Scotland's Banking Direct fares best at lower levels, at 14.9 per cent, while First Direct comes top in the £10,000-plus segment, with 13.9 per cent.

The Co-operative Bank has a promotion running to the end of March offering selected prospects - chosen for their creditworthiness - 12.6 per cent APR (variable) on loans between £2,000 and £10,000.

Borrowers wanting up to £5,000 or even £10,000 often prefer unsecured loans. Higher sums are usually lent on a secured basis. This may mean homes are at risk if customers do not keep up payments.

For house improvements, a further mortgage advance is the cheapest option. But lenders are keen to sell insurance with fixed-rate loans. According to Patrick Bunton, of London and County, the policies are often "sneaked in'' without customers realising they are optional.

Comparison of overdraft rates

Key to table:

a=fee charged each time overdraft exceeded; b=unauthorized O/D fee £3.50 per day plus £10 pm.;c=O/D rates tiered: up to £250 - 1% (12.6% EAR); over £250 - 1.5% (19.5% EAR); d=plus £7.50 for each increase in overdraft excess; e=fee only charged if overdraft exceeds £20; f=excess fee charged each day unauthorised overdraft increases by £10 or more; i=overdraft rates tiered up to £5k - 1.25% (16% EAR; over £5k - 1.10% (14% EAR); over £10k - 1.00%pm (12.60% EAR); j= no arrangement fee for credit zone limit (half monthly income), £9pm charged only if overdraft used; k= charge per day if overdraft exceeds £50; l= £15 for each referral up to a maximum of £45pm.

Banks/ Societies Authorised overdraft Unauthorised overdraft

EAR Fee Arrangement EAR Extra Unpaid

(qtly/mthly) fee fee cheque

Abbey National 9.9% - - 29.5% £12pm £20

All & Leic BS Alliance 9.5% - - 29.8% £15pm £25

Bank of Scotland

Banking Direct 11% apr - 0.5% min £20 26.5% apr - £10

Barclays Flexible 19.2% £5pm - 29.8% £10pm £20

Britannia BS React 365 12.02% £15pq - 28.02% £18pm £20

Cooperative Bank C'nt 19.56% £8pm 1% min 32.92% b £30

First Direct Cheque c - 1% min £20 26% £30d £25

Lloyds Current 19.4% apr - - 26.8% apr £7f £25

Midland Meridien i - - 26% - £25

NatWest Current/C'nt + 17.5% £9pm £30 j 29.5% £3.5k £27.50

Norwich & P BS Gold C'nt 18.1% apr £9pm - 30.2% apr £12.5 £20

RBS Personal 1.25% pm £2.50pm 2% min £15 27% apr l £25

TSB 18.8% £6pm - 29.8% £3pd £17.50

Woolwich BS 9.5 % apr - - 29.5% apr - £20

Source: Moneyfacts