What is the difference between a payday loan and a deposit advance?

Answer: Payday loans and deposit advances are both short-term, high-cost loans. Some of the key differences are who makes the loans, how the loan is requested, and how they are repaid.

Payday lenders make payday loans online or to people who visit their storefront locations. In contrast, banks and credit unions that offer deposit advances generally do so only for their customers who have accounts with them and meet certain other eligibility requirements.

A payday loan is usually due to be repaid on the borrower’s next payday, which is often two to four weeks from the date the loan was made. The specific due date is set in the payday loan agreement. The borrower can either return to the payday lender to repay the loan or allow the lender to withdraw funds from a checking account.

With deposit advance, banks and credit unions will usually pay themselves back automatically when the next electronic deposit to the customer’s account is made, regardless of source, which could be much sooner than two to four weeks. If the amount of the incoming deposit is not enough to pay back the loan, the bank or credit union will repay itself out of subsequent deposits. Typically, if any loan balance remains after 35 days, the bank or credit union will automatically charge the customer’s account for the remaining balance, even if that causes the account to become overdrawn.

Both payday loans and deposit advances charge fixed fees that are usually much more expensive than many other forms of credit. A typical two-week payday loan with a $15 fee for every $100 borrowed equates to an annual percentage rate (APR) of almost 400%.

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