Overdraft questions

Random

Can anyone help me out? I'm looking at some overdraft options. One says the interest rate is 12.95%. How does this apply in reality? Can someone tell me how to calculate this? For example say I owed €500 and it was overdrawn for 10 days.

Thanks!


* I will not use this as a substitute for proper financial advice.

Gordon

12.95% per year right?

At a quick rough guesstimate that would be roughly 1% per month and .33% for ten days. Therefore it would be 1.60 euros? Make it 2 euros for my bad maths.

dotsman

It depends on how the bank calculate the interest (this differs between banks).

See, for example, does the documentation refer to anything like ("interest is calculated daily and applied quarterly" etc).

If that is the case then the interest charged is:

daily rate = 12.95%/365.25 = 0.03545
after day 1, you owe 500*1.0003545 = 500.17725
after day 2, you owe 50017725*1.0003545 = 500.35456
after day 3, you owe 500.35456*1.0003545 = 500.53194
...
...
...
after day 10, you owe 501.77533

However, the interest may not be posted to your account until the end of the quarter, so you may owe even more (tiny amount).

This is the fairest (and cheapest for the customer) manner of calculating interest as it only charges you interest on the balance outstanding on any given day. Some banks charge you a whole month's worth of interest even though you were overdrawn for a few days of that month.

To be honest though, on such a small amount for such a short time, you are only talking about a difference of a few cent between the different ways (now, when it comes to your mortgage, or business loans, then you're talking about a big difference)

stepbar

The way overdraft interest is calculated depends on the account balance at the end of each day (as interest is calculated daily).

Ok, lets say your account was overdrawn to the tune of 1000 eur for the full year and

- that the amount did not change
- you were not subject to current a/c / overlimit fees
- and you paid the interest as soon as it was charged.

The maximum interest you would pay would be 12.95% of 1000 eur = 129.50 eur. If you're really smart you'd have the credit interest facility setup on your account. That way you're earning interest on the credit balances which would can set off against the debit balances later on in the month.

Random

As a general idea then it's not going to cost much more than a credit card?

The interest is 12.95% a year. This is compound interest.

Random

Also am i right in assuming any transactions that would normally come out of an account would also come out of the overdraft such as direct debits etc? Thanks