Understand how arranged overdrafts work, how EAR affects the cost, when short-term overdraft borrowing may help and when alternatives may be cheaper.
Structures vary by provider. Use this as orientation — then check your account terms.
What it is
A borrowing facility linked to your current account.
How you use it
You borrow when your account balance falls below £0, up to an agreed limit.
Cost
Interest is usually charged on the amount borrowed.
Rate
Often shown as an EAR.
Repayment
The balance reduces when money is paid into the account.
Main risk
Regular overdraft use can become expensive and hard to clear.
Your current account may have an agreed overdraft facility, subject to eligibility and account terms.
You begin using the overdraft when payments take the account into the agreed borrowing range.
Interest is typically charged on the amount borrowed while you remain overdrawn.
Salary or other credits reduce the amount you owe.
A borrowing limit agreed with your bank in advance.
When a payment would take the account beyond an agreed overdraft limit, or below £0 without an agreed overdraft.
EAR stands for Equivalent Annual Rate. It is designed to show the annualised interest rate for overdraft borrowing and helps compare the interest cost between accounts.
EAR does not necessarily tell you exactly what you will pay, because the actual cost depends on how much you borrow and how long you remain overdrawn.
Higher EAR generally means more expensive borrowing for the same amount and period.
EAR is not the same as APR. Do not treat them as interchangeable.
The more you use, the more interest can accrue.
Remaining overdrawn for longer generally increases the cost.
A higher borrowing rate increases the interest charged.
Some accounts may include interest-free buffers or other conditions.
Illustrative example only — not a current bank offer
Approximate illustrative interest using amount × EAR × days ÷ 365: £7.67
The exact interest depends on the bank’s calculation method and account terms. Approximate interest using amount × EAR × days ÷ 365. Actual bank calculations can differ.
Where possible, schedule Direct Debits after income lands to reduce time spent overdrawn.
Alerts can help you spot shortfalls before scheduled payments leave the account.
Even a modest emergency pot can reduce reliance on short-term borrowing.
Subscriptions and bills can keep pushing the account below £0.
Increasing a limit may ease pressure short term but can also increase interest if usage rises.
A planned amount over a longer period may suit a different product better than rolling overdraft use.
If you are struggling to clear the balance, missing essential bills or feeling that borrowing is escalating, contact your bank early and consider free independent debt advice.
Use calculators and guides to explore your own numbers — they do not recommend a specific product.
Estimate how different payments could affect the time and interest needed to clear a balance.
Open Debt Payoff CalculatorMap income against regular spending to see why the account dips below £0.
Open Budget PlannerFAQs
General education only — not personalised financial advice. Always check your bank’s current terms.
If you spot something that needs correcting or want to contact our editorial team, get in touch.