Overdraft calculations

DavidP24

Is there a resource that can provide the actual way overdrafts are calculated.

I noticed HSBC say on their site

Interest on your overdraft account is calculated only for the period the account is overdrawn. For example, if you have used credit on the 10th of the month and returned your balance to positive by depositing money on the 15th, you pay interest only for the period in between (for six days including the 10th and the 15th). The interest is calculated daily using the formula "Principal x Days x Interest: 30*100".

Only a bank could think that there are 6 days BETWEEN the 10th and the 15th and they wonder why everyone hates banks!

I see that banks quote an EAR rate so we can compare them equally but that does not help you verify what you are being charged.

I was told by my bank that the formula is

"The amount of the overdraft x 1.45% (monthly overdraft rate) x 3 months.

(3 months is the period that regulation states we must assume that the overdraft is outstanding)"

BUT the overdraft is charged on the daily balance outstanding

1.45 * 12 is 17.4% so I would expect a charge along the lines of

day 1 2000 * 17.4% / 365 = 0.954
day 1 1500 * 17.4% / 365 = 0.716

and so on

I am not sure how compounding works if this interest is charged daily but paid in the next month (they send you a notice at the end of the month saying they are going to charge you the following month.

So I would expect there to be some sort of calculation based on the number of days :

(next statement date - current date) + 30 days

or is that what the "3 months is the period" is above.

Does anyone have the formula?

dshart

Sorry I can't help with the formula, but I would like to comment that it is more than banks that class between the 10th to 15th as 6 days.

I think you would be pretty upset if you worked between 10th to 15th and only got paid for 5 days.

nomoneytoday

It is 6 days

1 - 10th
2 - 11th
3 - 12th
4 - 13th
5 - 14th
6 - 15th

YorkshireBoy

nomoneytoday wrote: »

It is 6 days

1 - 10th
2 - 11th
3 - 12th
4 - 13th
5 - 14th
6 - 15th

If you credit the account on the 15th (before the day's cut-off), then you're not overdrawn...because the decision as to whether you're overdrawn or not (for debit interest purposes) is taken at close of business. Is it not?

As to the original question, debit interest is calculated daily at:

Closing balance x annual non-compounded rate / 365

Notes:
The annual non-compounded rate is 12 x the quoted monthly rate
Some banks use 366 days in a Leap Year

Once per month the sum of these 30-31 days' interest charges are added to the account...and this is the point at which compounding occurs. The annual non-compounded rate then computes to the notional EAR if no further transactions are made on the account over the year.

meer53

The example you quoted states (for six days including the 10th and the 15th). quite logical really ? Which bit don't you understand ?

YorkshireBoy

meer53 wrote: »

The example you quoted states (for six days including the 10th and the 15th). quite logical really ?

If the example had stopped there, then yes I agree.


But it didn't stop there, it went on to say "returned your balance to positive by depositing money on the 15th"...so as per my post above, if the account was returned to credit ON the 15th then the account holder would not be overdrawn ON the 15th...would they?


I think that's the bit the OP is questioning?

PeacefulWaters

I bet they don't pay 6 days savings interest if a deposit is made on the 10th and withdrawn on the 15th.