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Direct deposit loans may seem like a quick and convenient way to get cash until your next paycheck, but their exorbitant fees can trap borrowers in a cycle of debt. (iStock)
Direct deposit loans are another term for payday loans, but instead of receiving funds in the form of cash or check, they are deposited directly into your bank account.
These loans can seem like a quick and convenient way to cover immediate cash flow needs until your next paycheck. But their exorbitant fees can trap borrowers in a cycle of debt.
Here’s what you need to know about direct deposit payday loans, as well as alternatives when you need cash fast.
If you are looking for a loan, Credible allows you to compare personal loan rates in minutes.
What are direct deposit loans?
Direct deposit loans are small, short-term loans that are deposited directly into your bank account – sometimes the same day you apply – and repayment is due on the day of your next scheduled payday.
Many other traditional loans, including personal loans, can be deposited directly into your bank account. But for this article, the term “direct deposit loans” is used to mean “payday loans”.
Although state regulations vary, direct deposit loans have some common characteristics.
- Small loan amounts – Most direct deposit loans are $ 500 or less.
- May require post-dated check – The lender may require you to provide a post-dated check for the total balance, including fees, or require authorization to electronically withdraw funds from your bank account. If you don’t repay the loan by the due date, the lender can cash the check or write your account for the full amount.
- Basic requirements to qualify – Most direct deposit loan companies do not consider your ability to repay the loan while meeting your other financial obligations during the approval process. They only require borrowers to be at least 18 years old and have an active bank account and proof of income.
With few credit requirements, direct deposit loans make it easier to borrow money for short-term needs like car repairs and other emergencies. Unfortunately, seven in 10 borrowers use them for regular and recurring costs such as rent and utilities, according to The Pew Charitable Trusts. With annual percentage rates averaging 391%, direct deposit loans are an expensive way to cover current expenses.
Advantages and disadvantages of direct deposit loans
Like any financial product, direct deposit loans have their pros and cons that you should consider carefully.
Benefits of direct deposit loans
- Easy access – With little need and cash within 24 hours, direct deposit loans are much more accessible to bad credit and low-income borrowers than traditional bank loans or lines of credit.
- No credit check – Most traditional lenders require borrowers to have good credit to qualify for a loan. But direct deposit loans do not require a credit check, so there is no serious credit check on your account that can lower your credit score.
- Insecure – Unlike auto loans and mortgages, direct deposit loans are not secured by your property, so the lender cannot foreclose on your property if you default on your payment. But the lender can have access to your bank account, so they can withdraw money from your account if you haven’t paid off your loan by the due date.
Disadvantages of Direct Deposit Loans
- High interest rates and fees – While many states cap direct deposit loan fees, even a seemingly low finance charge equates to a high annual percentage rate, or APR, due to their short-term nature. A two-week loan with a fee of $ 15 for every $ 100 borrowed equates to an APR of nearly 400%, according to the CFPB. Borrowing the same amount on a credit card with a 30% interest rate would be cheaper.
- Lock borrowers into a cycle of debt – If you can’t afford to pay off the loan when it falls due, the lender may allow you to turn the debt into a new loan (and pay additional fees). This dramatically increases the cost of borrowing and the time it takes to pay off the loan, trapping you in a cycle of debt. In fact, more than 80% of direct deposit loans are renewed or followed by another loan within two weeks, according to the CFPB.
- Target minority communities – Twice as many direct deposit lenders operate in communities with large numbers of black and Latino residents, and payday lenders are directing their marketing and advertising to black and Latino clients, according to the Center for Responsible Lending. So, people who have historically struggled to accumulate wealth are usually targeted by these predatory loans.
- Unexpected bank withdrawals are common – Your direct deposit lender may need to access your bank account. This access can be promoted for convenience, but one in three online direct loan borrowers have reported unauthorized withdrawals from their checking account, according to The Pew Charitable Trusts. If an unauthorized withdrawal results in an overdraft, you could face high fees from your bank on top of what you owe on your loan.
Overall, the disadvantages of direct deposit loans, like payday loans in general, far outweigh the advantages. It is important to consider all the alternatives before turning to a direct deposit loan as a last resort.
11 alternatives to direct deposit loans
Depending on the lender, your credit, and whether you have a co-signer, you could benefit from a lower APR and more favorable terms with a traditional personal loan. And once you’re approved, you can usually receive your money within a week – perhaps faster if you go through an online lender instead of a local bank branch or credit union.
If you need quick cash, consider one of Credible’s partner lenders, all of which offer quick loan financing.
With Credible, you can compare personal loan rates from various lenders without affecting your credit.
Before
- Loan amounts: $ 2,000 to $ 35,000
- Funding time: From the next working day
- Minimum credit score: 550
Axos Bank
- Loan amounts: $ 5,000 to $ 35,000
- Funding time: Next business day
- Minimum credit score: 740
Best egg
- Loan amounts: $ 2,000 to $ 50,000
- Funding time: Within 1-3 working days after successful verification
- Minimum credit score: 600
Discover
- Loan amounts: $ 2,500 to $ 35,000
- Funding time: From the working day following acceptance
- Minimum credit score: 660
Point Ready
- Loan amounts: $ 2,000 to $ 36,500
- Funding time: From the next working day
- Minimum credit score: 580
LightStream
- Loan amounts: $ 5,000 to $ 100,000
- Funding time: From the same working day
- Minimum credit score: 660
OneMain Financial
- Loan amounts: $ 1,500 to $ 20,000
- Funding time: From the same working day, but usually requires a visit to a branch
- Minimum credit score: Nothing
Prosper
- Loan amounts: $ 2,000 to $ 40,000
- Funding time: As soon as one working day
- Minimum credit score: 640
Universal Credit
- Loan amounts: $ 1,000 to $ 50,000
- Funding time: Within one business day once approved
- Minimum credit score: 560
To improve
- Loan amounts: $ 1,000 to $ 50,000
- Funding time: Within one day of having carried out the necessary verifications
- Minimum credit score: 560
Reached
- Loan amounts: $ 1,000 to $ 50,000
- Funding time: As soon as one working day
- Minimum credit score: 580
How to get a personal loan
When it comes to personal loans, there is no one-size-fits-all option. Here are some steps that can help you find the right loan for you.
- Prepare your finances. Some lenders work with borrowers who have poor credit, but good or excellent credit will give you the best interest rates.
- Compare the prices. Many lenders allow you to check rates online without a complete application or a serious credit check. Shop around to several different lenders to compare interest rates and terms.
- To apply. Once you’ve found a good deal, follow the lender’s instructions for submitting a request. Eligibility requirements vary from lender to lender, but you usually need to authorize a credit check, verify your identity, and provide proof of income.
- Close your loan. Once your loan application is approved, the lender will send you the final loan agreement to sign. After signing the documents, the lender will usually deposit the funds into your bank account, often within one business day.
If you are looking for a personal loan, compare personal loan rates using Credible.
Other options for quick financing
Personal loans are not the only direct deposit loan alternative to help cover unforeseen expenses. Here are a few more to consider.
- Credit card – If you have good credit, you may be eligible for an interest-free credit card for a limited period. But even if you don’t qualify for an interest-free credit card, a high interest credit card is likely to be even cheaper than a direct deposit loan.
- Pawn shops – Pawn shop loans do not require a credit check. You leave something of value as collateral and borrow a percentage of the item’s value. As long as you pay off the loan within a certain time, you get your item back. Be sure to read the fine print, however: According to state law, APRs on pawn shops can exceed 200%.
- Cash advance applications – Many online and physical retailers are now partnering with ‘buy now, pay later’ (BNPL) apps that allow shoppers to buy the items they want now and pay for their purchases over time – often in four bi-weekly installments. Many BNPL services do not charge interest as long as you make your payments on time.
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