Starting from 2nd Nov, Lloyds are changing their overdraft fees and rates.
There will be no charge for unauthorised overdrafts, as I understand it,
but their rates will be charged at 1p for every £7 you are overdrawn, everyday.
I will be switching banks, so it won't bother me.
However, today I worked out the EAR that the new rates would be equivalent to.
If x is your current overdraft,
after 1 day you will be charged (x/7)×0.01=x/700.
So your overdrawn balance will be x+x/700 after one day, assuming you spend nothing else.
Factorize the x out, and this is the same as x(1+1/700).
After 365 days that will be x(1+1/700)^365 = 1.68x.
Therefore, the effective percentage increase over the year is 100*(1.68x-x)/x=100*0.68=68%!!!!!!
Have I made a mistake?
That is an obscene rate of interest!!!
They say in the literature they sent me that this is to make it easier to understand the charges and control your overdraft, which I find extremely disingenuous.
I would argue that it is nothing more than a greedy, profiteering, cynical ploy to profit from people, many of whom (including me) may already be struggling to keep their overdraft under control, and may not realize exactly how much more it will cost them.
Moreover,
I have not seen anywhere in their literature a statement of the EAR or APR.
I even phoned them this afternoon and asked what the EAR of the new charges is, and she could not give a figure.
They may be calculating their rates daily, but it does not mean the EAR cannot be calculated, as I have done above.
I'm not sure about this, so maybe someone who is well versed in credit law can clarify,
but I think that may even be illegal from the quick research I did. I
think it is a requirement that lenders provide a percentage EAR or APR rate so that consumers can make meaningful comparisons between lenders.
Is this correct? If so, can you give a reference to the appropriate piece of legislation?
Apart from my specific questions about the legality of this, I just wanted to warn people.
I'm surprised it hasn't been mentioned yet.