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Wednesday, 3 October 2012

Overdrafts and other bank debts

Overdrafts and bank loans can be easy ways of borrowing money quickly. But they may cost more than you think, especially if you go overdrawn without asking your bank first. Always make sure you understand the interest rates, fees and terms involved when you borrow money.

Borrowing from banks

Before you borrow money, always consider whether:

  • you really need a loan
  • you can afford to repay it

Overdrafts

An overdraft allows you to spend more money than you have in your bank account - up to a limit agreed with your bank. You only pay interest on the overdraft money you use, and you don't have to tell the bank what you're using the money for.

If you go over the limit, or overdraw without arranging it with your bank first, you may have to pay a penalty charge and a high rate of interest. Your bank will probably charge you for sending you a reminder letter, and for any Direct Debits or cheques you put through the account.

The bank may also freeze your account until the overdraft is paid off - which will mean you won't have access to any money, such as your salary, paid into the account.

Some banks also charge a monthly fee and a fee for setting up the overdraft, so it can be expensive if you borrow a lot of money and don't pay it back quickly.

Do you need a new bank account

Some banks or building societies will take all the money in your account to clear the overdraft or loan. You should consider opening a basic bank account elsewhere to have your wages paid into just in case.

Bank loans

A loan is a formal arrangement, usually for a fixed period of time (which you agree at the start). If you're thinking about taking out a loan, you'll need to agree with your lender:

  • how much money you can borrow
  • how long you can borrow it for
  • how much interest you'll pay

You'll need to check the monthly repayments carefully to make sure you'll be able to afford them. It's also a good idea to shop around for the best deal before you make a decision. Also, make sure any debt isn't secured against your home.

What to do if you have difficulty with repayments

Money you owe to your bank is a non-priority debt (unless you have a loan secured on your house), but you can still be taken to court by your bank and ordered to pay what you owe - often with extra costs on top.

If you owe your bank money:

  • make a list of all your debts
  • decide which ones you need to pay off first (your 'priority' debts)
  • work out your personal budget
  • calculate how much you can offer to pay each month
  • talk to your bank about the situation

Managing repayments

If you can't manage your repayments, it's important to contact your lender as soon as possible. The Lending Standards Board commits your lender to look at your position sympathetically and positively under the ‘Lending Code’.

They'll often be prepared to discuss options such as:

  • changing the amount you have to pay each month
  • freezing interest and charges
  • letting you stop paying for a while or pay small instalments
  • paying off the loan over a longer period

Missing repayments

If you regularly miss repayments and don't talk to your lender about your circumstances, your bank could take you to court for non-payment and get a County Court Judgment (CCJ) against you. This will count against you if you apply for credit in any form for the next six years.

Many lenders, such as banks and credit card companies, have agreed with the government to give borrowers 30 days ‘breathing space’ to deal with their debts. You must seek advice from a free advice agency first. You then need to write to your creditors and ask them to hold action for 30 days under the breathing space commitment.

Negotiating with your bank

It's always worth trying to get your bank to offer a better deal on rates and conditions.

Whenever you're negotiating a loan or overdraft, it's a good idea to show that you've thought carefully about it. As well as talking to the bank, you could write a letter explaining:

  • your reasons for needing the money
  • how long you think you'll need it for
  • how you're going to repay it

It's important to be honest about your financial position. If you're worried about money, it's a good idea to get in touch with your bank as soon as possible.

Settling disputes with your bank

If you disagree with a decision, you can complain to your bank. Disputes might be about:

  • interest added to a loan
  • extra fees which weren't expected
  • the withdrawal of a loan facility

You may be able to claim back bank charges that have been added to your account if, for example, you went over your overdraft limit. The information on what to do about bank charges can change - see below.

Give your bank up to eight weeks to try to resolve your complaint. The bank should then send you a letter setting out its final decision and telling you how to contact the Financial Ombudsman Service (FOS) if you are unhappy with the result.

If you don't receive a final letter within eight weeks, and you don't want to give the bank more time, you can contact the FOS for a complaints form.

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