Direct-Deposit Loans vs. Payday Loans | PaydayLoanSolutions.Net

Banks have now started offering quick emergency loans known as direct-deposit loans that give customers access to short-term advances only if they have a well established relationship with the bank. Akin to payday loans that are offered by reliable payday lenders, these direct-deposit advance loans share some of the same characteristics and operate and function just like payday loans. A number of banks in the US such as U.S. Bank, Wells Fargo, and Regions Financial are now offering a feature through which bank depositors can borrow money against their Social Security check, next paycheck, or unemployment benefit, which is directly deposited in their bank account. Banks state that these products that they offer are quite different from payday loans because they have lower interest rates compared to traditional payday loans and these loans are made only to their existing customers.

On an average, customers are allowed to borrow a maximum amount of USD 500 and some banks such as Wells Fargo limit the loan to USD 500 or half of the direct deposit. Just like payday loans, these direct-deposit loans were introduced to give customers access to emergency cash and depending on when funds are deposited in the customer’s bank account, the bank is automatically reimbursed within a few days to a couple of weeks later. Studies indicate that based on the typical lending term of 10 days and depending on the loan amount that remains outstanding; these loans can have an annual interest rate of 365% to 400%.

Payday loans are a better option when compared with direct-deposit loans because unlike the former where a consumer typically has 14 days to pay it back, the latter does not offer a window of even 10 days for repayment. In fact, as soon as a direct deposit comes into the account, the bank takes the money plus interest. Banks that provide voluminous disclosures on these types of loans have been ordered to clearly disclose fees, to limit repeat loans, and not to automatically enroll consumers as a part of the regulation process and proposed guidelines for direct-deposit loans. These loans are not intended to solve longer-term financial needs because they have a recurring direct deposit into a checking account.

Direct-deposit loans are an expensive form of credit and they have been primarily designed to help customers only through an emergency situation and to meet occasional, unexpected, and immediate credit needs. Apart from the stiff fees associated with them, the downside of direct-deposit advances is that with the banks getting paid automatically once money comes into the customer’s account, these types of loans can create a cycle of indebtedness. So, people who have expenses that need to be paid the next day risk triggering overdraft fees or bouncing a check. There are a number of safeguards in place to reduce the likelihood of customers becoming dependant on these loans and to help them establish or rebuild their credit, banks report customer repayment history directly to the credit bureaus.