In the red, but without the rip-off rates

There used to be a stigma attached to being in the red, but these days it is less a case of deciding whether you should borrow money and more a case of how you are going to borrow it.

There used to be a stigma attached to being in the red, but these days it is less a case of deciding whether you should borrow money and more a case of how you are going to borrow it.

New figures released last week show the average Briton owed £4,000 in unsecured debt at the end of 2004, according to market analyst Datamonitor. The average adult owed £1,302 on credit cards, £1,892 on unsecured personal loans and £812 on overdrafts and motor and retail finance deals.

All of this is contributing to the increasing level of personal debt, which has now broken through the £1,000bn barrier. For those who spend more time in the red than in the black, a cheap overdraft will be a crucial part of their financial armoury.

Like all financial products, it comes at a cost - one that will vary between lenders, says Daniel Newbolt, cards and loans spokesman for financial analyst Moneyfacts. Rates for authorised overdrafts on the high street vary from 8 per cent to more than 18 per cent, but real caution is needed if you're likely to exceed the limit.

Not only will you usually be charged interest at a punitive unauthorised rate - as high as 30 per cent - but you may also be charged a fee of around £25. In some cases, these penalties can build up considerably in only a matter of days.

Barclays, HSBC, Lloyds TSB and NatWest are notorious for paying paltry levels of interest on balances in credit, while levying hefty fees on balances in the red. An authorised overdraft on the Lloyds TSB Classic account is charged at 18.2 per cent but rising to 29.8 per cent if you break your limit. HSBC does best, charging a flat rate of 14.8 per cent.

Borrowers should look elsewhere. Alliance & Leicester's Premier and Premier Plus current accounts are open to anyone paying in £500 or £1,000 a month respectively. The overdraft rate is set at 0 per cent for the first year up to a maximum of £2,500 - at which time this moves to a rate of 7.9 per cent.

Despite Nationwide building society raising its FlexAccount overdraft rates by 1 per cent this week, it is still offering the next best deal after A&L. From Tuesday it will charge 7.75 per cent on agreed overdrafts and 24.9 per cent on unauthorised balances.