Over 500,000 existing Monzo customers will have the option to withdraw more than their account balance as the challenger bank rolls out its new overdraft facility.
The overdraft must be pre-arranged, and will cost 50p per day – up to a maximum of £15.50 per month. There’s also a £20 buffer fee-free to allow for delayed transactions that can unexpectedly take people into their overdraft.
This comes after the bank officially closed its Beta prepay card model earlier this month. Existing customers were given the option to switch to the bank’s current account, or close their prepaid account.
Which? has looked at what overdraft deals other banks are offering to see how Monzo’s compares.
How does the Monzo overdraft work?
All Monzo users will be offered the option to ‘Find out about overdrafts’ on their Monzo app. But users will only be eligible if they have ‘healthy finances’, are over 18 and have a regular income, Monzo says.
As this suggests, you’ll undergo a credit check with Callcredit before you can access the overdraft. Those with a poor credit score, previous bankruptcy or those who haven’t had a Monzo account for very long aren’t likely to be approved.
You can set your overdraft limit between £50 and £1,000 – the maximum amount offered may vary depending on your credit score.
If you are successful in getting a Monzo overdraft, you’ll receive an alert when you’re about to be overdrawn, as well as when you’re going to be charged.
Fees are charged, and reset, on the 1st of each month. The alerts and flat-rate fees should making sure you don’t get any nasty surprises.
- Find out more: Challenger and mobile banks – we review the likes of Monzo Bank, Starling Bank, Revolut and Atom Bank.
What if I don’t have an overdraft?
If you don’t want to use the Monzo overdraft, you don’t have to do anything – the feature is only available if you actively switch it on.
If you don’t the overdraft in place, any payments you try to make will be rejected unless you have sufficient funds in your account – and there’s no fee for this.
Offline payments can’t be rejected, but you have until the end of the day to add money to your account to cover these expenses.
How does it compare with other overdraft on the market?
We’ve found several current accounts with pre-arranged overdrafts that work out cheaper than the Monzo overdraft. This is based on someone running a £500 authorised overdraft for two weeks a month.
The First Direct 1st account has an authorised overdraft rate of 15.9%, but the first £250 of the overdraft is interest-free. This means it would cost £17 for the year in our scenario.
M&S Bank current account has the same 15.9% rate, but only the first £100 of the automatic £500 overdraft is interest-free. This means it would cost £27 for the year.
In third place is the Nationwide FlexAccount, which charges 18.9% as its authorised overdraft rate. However, as it offers the first three months interest-free, you’ll pay £40 for the year.
By comparison, paying 50p a day for two weeks a month with Monzo would cost you up to £84 over a year.
- Find out more: Best bank accounts for authorised overdrafts
Best accounts for unauthorised overdrafts
If you’d prefer an unauthorised overdraft, there are other current accounts to consider.
Based on being overdrawn for two days in a row in a month, we’ve found the best options for unauthorised overdrafts – though it’s worth noting that these are still expensive. If you regularly have larger and more persistent overdrafts, a pre-arranged facility may be better for you.
Barclays Bank Account has a £5-a-day charge for going overdrawn – resulting in a monthly charge of £10 in our two-day scenario.
Natwest’s Reward account and RBS Reward Account both have a £6 daily charge, so they’d be £12 for the month if you were overdrawn for two days in a row.
- Find out more: Best bank accounts for unauthorised overdrafts
Is Monzo right for me?
Monzo has an easy-to-use app with analytics that help you track your spending. It also offers free spending overseas, and £200 fee-free overseas withdrawal allowance.
Depending on how you want to use your current account, it’s worth considering that Monzo does not currently offer any rate of interest – whereas with the likes of the Nationwide FlexAccount, you could earn up to 5% APR (with some caveats).
If you want your money to grow at a rate that beats inflation, you may want to take this into account.
Monzo is also online-only, so those who prefer to visit a branch might opt for a different provider.