Daily Junction.mobi portalPersonal Finance · May 18, 2026 · Rachel Stone · 5 min
An overdraft lets you spend more than is in your current account, but it is a form of borrowing with real costs. This UK guide explains arranged and unarranged overdrafts, how charges work since the FCA's reforms, and cheaper alternatives.
The overdraft is one of the most familiar — and most misunderstood — forms of borrowing in Britain. Because it lives inside your current account, it can feel like an extension of your own money rather than a loan. It is not. Used occasionally it is a handy safety net; relied on month after month it can quietly become an expensive habit. This guide explains how overdrafts work, the difference between arranged and unarranged, how charges changed after major reforms, and the cheaper options worth considering. This is general information, not financial advice.
An overdraft is a facility attached to a current account that lets you keep spending after your balance hits zero, up to a set limit — in effect, borrowing money from your bank. When you dip into it, you owe the bank, and interest is charged on the amount you use until you repay it.
The key mental shift is this: money in an overdraft is not your money. A balance of "−£150" means you owe £150, not that you have a buffer. Treating the overdraft as part of your spending power is how occasional use turns into a permanent overhang that is surprisingly hard to clear.
Overdrafts are a form of unsecured borrowing — there is no asset attached, unlike a mortgage. If you want the wider picture on how that compares with other loans, see our guide to secured versus unsecured loans.
An overdraft is the most convenient borrowing you will ever do — which is exactly why it is so easy to lean on without noticing the cost.
There are two ways to be overdrawn, and the distinction matters:
For years, unarranged borrowing and a tangle of daily and monthly fees made overdrafts confusing and, for some, very costly. That is what prompted the regulator to step in.
In 2020, the Financial Conduct Authority (FCA) introduced major reforms to make overdraft pricing simpler and fairer. The headline changes were:
The reforms made charges more transparent — but not necessarily cheap. Many banks settled on overdraft APRs that are high compared with other forms of credit, so an overdraft used for ongoing borrowing can still cost a lot. Understanding the rate is essential, and our guide to APR and the true cost of borrowing explains how to read it.
| Feature | Arranged overdraft | Unarranged overdraft |
|---|---|---|
| Agreed in advance? | Yes | No |
| Pre-2020 cost | Variable fees | Often very high fees |
| Since FCA reforms | Single APR | Same rate as arranged |
| Best used for | Short-term, planned gaps | Avoid where possible |
An overdraft is a tool, and like any tool it suits some jobs better than others.
It can be reasonable for:
It is usually a poor choice for:
If you find yourself living in your overdraft — going overdrawn every month and never getting back to zero — that is a sign the underlying issue is a budget that does not balance, not a need for a bigger limit. Our guide to making a budget that works can help you find the gap, and a small emergency fund is the single best way to stop relying on an overdraft for surprises.
Before leaning on an overdraft for anything more than a brief, small shortfall, weigh up the alternatives:
If overdraft debt has become persistent, free and impartial help is available from MoneyHelper and Citizens Advice, and debt charities such as StepChange can advise at no cost. Seeking help early gives you more options.
An overdraft is borrowing dressed up as part of your current account, and that disguise is its main danger. There are two kinds — arranged, agreed in advance, and unarranged, which you should avoid — and since the FCA's 2020 reforms both are charged at a single, comparable APR, with no penalty premium for going unarranged. That makes the cost clearer but not low: overdrafts can be an expensive way to borrow over time. Use one only for short, small gaps, build a buffer so you need it less, and if you are permanently overdrawn, treat it as a budgeting signal and seek free help.
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