Your overdraft is the priciest debt you carry — here is the math

A £2,000 overdraft costs nearly three times what a personal loan would for the same amount. The switch takes an afternoon, not a year.

The debt that hides in plain sight

A small overdraft balance that creeps back after each paycheque can feel trivial, but at the arranged overdraft rate of 34.53%, it is the most expensive borrowing product most households touch. When you look at the broader market, the disparity is stark. The average £5,000 personal loan sits at 12.08%, while the £10,000 loan stands at 6.9%. Even credit-card purchases, often considered expensive, average 24.71%. Your overdraft is the clear outlier, sitting well above every other common debt instrument.

These figures are Bank of England market averages of advertised rates, not any one person’s specific offer. Your own rate may differ, but the ranking is very unlikely to change. You are almost certainly paying more for your overdraft than you would for a personal loan or a credit card. This is not a temporary spike. The rate was 34.53% in July 2026, unchanged from the month before, and only down 0.02 points from the 34.55% recorded a year earlier. Waiting for the rate to fall is not a realistic strategy. The cost is persistent, and the gap between your overdraft and other borrowing options is wide enough that it demands attention now.

Worked example: £2,000 over one year

Assume you carry £2,000 in debt for one year, paying the minimum plus an extra £50 monthly. The software calculates the total interest on that balance at the 34.53% overdraft rate, then shows how much interest you save by making those overpayments. This highlights the direct benefit of clearing the balance faster.

The example contrasts the cost of keeping funds in the overdraft versus using them to pay off the debt. Because the overdraft rate exceeds the 12.08% average personal loan rate, clearing the overdraft is the better use of that money than leaving it idle. Paying off debt that costs more than your savings earn usually leaves you better off, provided you keep a small emergency buffer and check for early-repayment charges.

Note that the 12.08% figure is the advertised average for a £5,000 loan. A smaller loan may carry a slightly different rate, and some lenders add an arrangement fee. You should check your own specific quote to see how it compares to your overdraft terms.

What to do this week

Log in to your current-account statement and note the highest overdraft balance you have carried in recent months; that is your working figure. Get a firm written quote for a personal loan of that amount (or the nearest product tier) from at least two lenders, asking for the total repayment and any arrangement fee. Compare the total cost of the loan (interest plus any fee) against one year of overdraft interest at your own rate; the previous section outlined the shape of the gap.

If the loan wins, transfer the balance, cancel or reduce the overdraft facility, and set up a standing order for the repayment so it does not slip. Set aside a small buffer in a separate instant-access account (the market average rate is 2.07%) so you do not dip back into the overdraft next month.

Consider the specific numbers from the calculation. For a £2,000 balance over one year, the monthly payment is £199.46, with total interest of £393.49. Overpaying by £50 a month reduces total interest to £306.94, saving £86.55 and clearing the debt 2 months (about 0.2 years) sooner. Alternatively, treating £600 in overpayments as saved funds avoids £207.18 of interest at the higher rate, compared to £72.48 earned in savings at the lower rate, before tax. The spread is 22.45 percentage points, meaning overpaying puts you £134.70 ahead.

Who this helps most, and what to check first

This advice is most useful for households with a small, persistent overdraft, ranging from a few hundred to a couple of thousand pounds, that has been carried for more than a couple of months. It is less relevant if the overdraft is genuinely a short-term bridge around paycheque, or if you are already on a 0% balance-transfer deal; in that case the clock is ticking and the same logic applies once the interest-free period ends.

Caveats to state plainly: the rates used here are Bank of England market averages, not personal offers; a personal loan may have a minimum amount or an arrangement fee; some lenders will not lend to people with an existing overdraft. Close with the general principle: paying off debt that costs more than your savings earn usually leaves you better off, but always keep a small emergency cushion first and check for early-repayment charges on any product you are closing.

This digest was drafted by StreetOwl’s own model from published figures and the sources listed, then read and approved by Michael Rossi on 1 October 2026 before it went up. It is general information, not financial advice: your circumstances are yours, and for a decision that matters, MoneyHelper (free, government-backed) or a regulated adviser is the place to go. General information, not personal financial advice. Figures checked on the dates shown.

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