Would you like an overdraft with an 800,000% interest rate?

Is it any wonder that people find themselves in serious debt, which can lead to the need for a Scottish trust deed, when a major bank can charge 819,100% APR on a 28 day unarranged overdraft of £100?

Radio 4’s Money Box programme has revealed that certain well-known banks are charging astronomic interest rates where people go slightly over their overdraft limit, something that could help to hurl you into a position where you need a trust deed. The above example is what you’re exposed to if you bank with Santander for example. Other banks don’t do much better:

• Barclays APR would be 366,000% APR according to Money Box
• Lloyds TSB also come in above 300,000% APR

Of course, we should all stay within our overdraft limits. However, when someone is juggling their finances due to growing debts, it’s very common for a small mistake to be made at some point. The end result is the rapid build-up of further debt to be added to the underlying problem that already existed. Such a scenario is a debt spiral, the point at which debt escalates in a way that is out of control, and which is often the precursor to seeking advice on solutions such as a protected trust deed.

Politicians and the media have been looking closely at the high-cost credit market recently. With the industry for payday loans and doorstep lending booming, and with insolvency firms that provide trust deed and sequestration services seeing this new type of lending cause much further debt distress, high-cost credit providers are a sitting duck for criticism.

What is the APR on a payday loan? Often it’s in the range of 2000% to 3000%; this is enormous and to some people offensive, but nothing of the scale delivered by some of our “respectable” high street banking giants for an unarranged overdraft. However the payday loan industry is guilty of letting people “roll over” multiple loans which means that people now often sign a trust deed in Scotland with several payday loans on their list of creditors.

The banks may defend themselves by saying that the comparison is unfair as the payday lender agreed to lend the money but the bank did not. That hints at an element of punishment in the costs involved, and also totally ignores the fact that the bank could have acted to prevent the unauthorised overdraft from happening at all. In most cases, a bank allows a transaction to go through which leads to an unauthorised overdraft and associated penalties. They could simply have stopped the transaction.

Whether it’s a usurious bank or an expensive payday lender, the facts are that high cost credit is generally only sought out by people who can no longer access mainstream credit. Debt and trust deed advisers often see a pattern amongst the creditors of their clients. From a few years ago, there may be a substantial loan or two from high street lenders. There might be a few mainstream credit cards with significant balances as well. The period running up to the start of the Scottish trust deed often sees the acquisition of payday loans, unauthorised overdrafts, expensive store cards or doorstep lending.

It’s not the high cost lending that causes the debt problem and trust deed levels entirely, but it can serve to ensure that the overall financial position becomes unsustainable without serious measures being taken such as sequestration or a protected trust deed. As politicians consider the impact of high cost credit, we’d suggest they include the practices of mainstream banks in their deliberations.

If you have been forced into a rocky financial position by overdraft interest rates, and are interested in using a trust deed to help you manage your debts, visit the rest of our trust deed forum here at Trust-Deed.co.uk. You’ll find trust deed information, advice, guidance and a trust deed forum in which you can discuss trust deed and debt issues with fellow debtors as well as trust deed experts. For personal, one-on-one trust deed advice from qualified debt management professionals, call 0800 043 7201 today.

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