Putting the brakes on bank interest

An interest bill of £3,333 charged by AIB on an overdraft of £4,000 was recently described by Judge Esmonde Smyth in the Circuit Court as "an extraordinary sum". While AIB has insisted that its calculation of the interest owed by the customer was correct, the figures will seem incredible to most bank customers who read about the court case. The case should act as a warning to bank customers. The interest bill of 83 per cent, or about 24 per cent per annum, on an overdraft taken out in September 1994 appears very hard to justify.

But depending on the overdraft arrangements made and, particularly, if the overdraft was not repaid within the time period agreed, bank customers can end up with very significant interest bills. This is particularly relevant to people who take out overdrafts while they are waiting for financial settlements following accident or injury claims. Where the court cases involved take longer than expected and the agreed term of the overdraft expires without repayment of the loan, banks then charge the full amount outstanding from the customer at a penalty rate - the agreed rate plus a surcharge. This means that for each month the overdraft remains unpaid, the customer is charged interest at the agreed rate plus the surcharge rate on the full amount of capital and interest owed. AIB has declined to provide The Irish Times with a breakdown of the interest and surcharge or penalty interest charged in this case, which related to a loan from the Swords branch of AIB to a woman in Whitehall, because it does not comment on individual customer accounts. But, in a move which should help customers by making bank accounts more transparent, the bank announced this week that, from June, it intends to provide breakdowns between the regular interest change and any interest penalty within the customers total interest bill.

A spokesman explained that interest was currently charged at a rate of 11.75 per cent on authorised overdrafts. Where the agreed overdraft limit is exceeded, banks charge the agreed rate plus a surcharge or interest penalty on the difference between that limit and the amount of the overdraft. The current monthly surcharge rate at AIB for "unauthorised borrowings" is 0.75 per cent subject to a minimum charge of £2. For example, where the agreed overdraft is £5,000 and the customer's account is overdrawn by £5,400, a monthly penalty interest charge of about would be about £7 - in addition to the normal monthly interest of about £50 on the £5,000.

But if the term of the overdraft has expired and the overdraft is £5,400 then the monthly interest bill will be charged on the full £5,400 and it will be based on the normal interest charge plus the surcharge. The monthly charge on the "unauthorised" AIB overdraft would then be about £95, some £40 of which would be a surcharge. The charge would be even higher in the following month because the outstanding interest and surcharge of £95 would be added to the £5,400 and the interest bill calculated on the total. In this way, a bank customer's total indebtedness to the bank can mount up very quickly.

The way to try to avoid penalty charges when unable either to keep within the overdraft amount or to repay when the term expires is to renegotiate the loan with the bank if possible.