Lloyds Banking Group is to scrap all unauthorised overdraft fees and radically simplify the charges for agreed account borrowing, ahead of a regulatory clampdown in the autumn.
Under the current system, customers with an approved overdraft pay a £6 monthly fee and interest of almost 20 per cent a year.
If they go more than £25 over the agreed level, they face additional charges of around £10 a day plus £10 for each blocked payment, up to a limit of £30 a day.
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From November, all fees will be removed and replaced with a simpler interest charge that equates to 1p per day for every £7 borrowed.
This will apply to all 20 million account holders across all three Lloyds brands, including Halifax and Bank of Scotland.
Lloyds says nine out of ten borrowers will be better off under the new regime, including almost anyone who uses unplanned overdrafts and those who use low-level planned overdrafts.
However, The Guardian says the new charges equate to an annual interest rate of 52 per cent and will mean higher charges for those who use a large, planned overdraft facility for prolonged periods.
Lloyds said it hoped the changes "would encourage regular users of large overdrafts to switch to a personal loan instead".
All banks from September will be forced to introduce a cap for overdraft use, at a level set by the bank.
Royal Bank of Scotland and its Natwest brand will introduce a cap of £80 a month from 24 July, while HSBC has also announced it will reduce unplanned overdraft fees to £5 a day up to a maximum of £80 per month.
Lloyds will introduce a cap of £95 a month from the end of August, which will be superseded by the new structure in November.
While its new charges have been welcomed by consumer groups, some warn they are not the cheapest available.
Andrew Hagger, personal finance expert with Moneycomms, told the BBC there were "at least eight banks providing lower cost overdrafts".
