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Direct deposit loans may seem like a quick and convenient way to get cash until your next paycheck – but their sky-high fees can keep borrowers trapped in a debt cycle. (iStock)
Direct deposit loans are another term for payday loans, but instead of receiving funds in the form of cash or checks, they are deposited directly into your bank account.
These loans seem like a quick and convenient way to meet your immediate cash needs until your next paycheck. But their sky-high fees can keep borrowers trapped in a debt cycle.
Here’s what you need to know about direct deposit payday loans, plus some alternatives when you need cash fast.
When looking for a loan, Credible lets you compare personal loan rates in minutes.
What are Direct Loans?
Direct loans are small, short-term loans that are deposited directly into your bank account – sometimes the same day you apply – and repayment is due the next scheduled payday.
Many other traditional loans, including personal loans, can be deposited directly into your bank account. But in this article, the term “direct deposit loan” is used to mean “payday loan“.
While government regulations vary, direct deposit loans share some common features.
- Small loans – Most direct loans are available for $ 500 or less.
- May require a post-dated check – The lender may require you to produce a post-dated check for the full balance, including fees, or require authorization to withdraw funds electronically from your bank account. If you fail to repay the loan by the due date, the lender can cash the check or collect your account for the full amount.
- Basic requirements for qualification – Most direct deposit loan companies do not consider your ability to repay the loan while meeting 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 lending makes it easy to borrow for short-term needs like car repairs and other emergencies. Unfortunately, according to The Pew Charitable Trusts, seven out of ten borrowers use them for regular, recurring expenses like rent and utilities. With average annual interest rates of 391%, direct deposit loans are an expensive way to meet daily living expenses.
Advantages and disadvantages of direct loans
Like any financial product, direct lending has advantages and disadvantages that you should weigh carefully.
Benefits of direct lending
- Easily accessible – With few requests and cash within 24 hours, direct loans are much more accessible for 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 ratings in order to qualify for a loan. However, no credit check is required with direct lending, so there is no harsh credit request on your account that can affect your credit score.
- Not safe – Unlike car loans and mortgages, direct deposit loans are not secured by your property, so if you default on payments, the lender will not be able to seize your property. However, the lender may have access to your bank account so they can withdraw funds from your account if you haven’t paid back your loan by the due date.
Disadvantages of direct loans
- High interest and fees – While many states limit direct deposit fees, even what appears to be a low funding fee is equivalent to a high annual percentage rate (APR) due to its short-term nature. A two-week loan with a fee of $ 15 per $ 100 is equivalent to nearly 400% APR, according to CFPB. Borrowing the same amount on a credit card at 30% interest would cost less.
- Trapping borrowers in a debt cycle – If you cannot afford to repay the loan when it is due, the lender may allow you to convert the debt into a new loan (and pay an additional fee). This significantly increases the cost of borrowing and the time it takes to pay back the loan, and keeps you trapped in a debt cycle. In fact, more than 80% of direct deposit loans are renewed or followed by another loan within two weeks, the CFPB says.
- Addressing minority communities – Twice as many direct deposit lenders operate in communities with large numbers of Black and Latin American residents, and payday lenders target Black and Latin American customers with their marketing and advertising, according to the Center for Responsible Lending. So people who struggled to amass wealth in the past are usually the target of these predatory loans.
- Unexpected bank withdrawals are common – Your direct deposit lender may need access to your bank account. This access can be advertised as a convenience, but according to The Pew Charitable Trusts, one in three online direct deposit borrowers reported unauthorized withdrawals from their checking account. If an unauthorized withdrawal results in an overdraft, your bank may incur high fees on top of your credit.
Overall, the disadvantages of direct deposit loans, like payday loans in general, far outweigh the advantages. It is important to consider all of the alternatives before turning to a direct loan as a last resort.
11 alternatives to direct lending
Depending on the lender, your loan type, and whether you have a co-signer, a traditional personal loan may qualify you for a lower APR and more favorable terms. And once you’re approved, you can usually get your money within a week – potentially faster if you go through an online lender rather than a local bank branch or credit union.
If you are in need of cash quickly, consider one of Credible’s partner lenders, all of whom offer fast loan financing.
Credible allows you to compare personal loan rates from different lenders without compromising your creditworthiness.
Avant
- Loan Amounts: $ 2,000 to $ 35,000
- Funding time: The next working day
- Minimum creditworthiness: 550
Axos Bank
- Loan Amounts: $ 5,000 to $ 35,000
- Funding time: The next working day
- Minimum creditworthiness: 740
Best egg
- Loan Amounts: $ 2,000 to $ 50,000
- Funding time: Within one to three working days after successful verification
- Minimum creditworthiness: 600
Discover
- Loan Amounts: $ 2,500 to $ 35,000
- Funding time: The next working day after acceptance
- Minimum creditworthiness: 660
LendingPoint
- Loan Amounts: $ 2,000 to $ 36,500
- Funding time: The next working day
- Minimum creditworthiness: 580
LightStream
- Loan Amounts: $ 5,000 to $ 100,000
- Funding time: Already on the same working day
- Minimum creditworthiness: 660
OneMain Financial
- Loan Amounts: $ 1,500 to $ 20,000
- Funding time: Already on the same working day, but usually requires a visit to a branch
- Minimum creditworthiness: None
Thrive
- Loan Amounts: $ 2,000 to $ 40,000
- Funding time: Already on a working day
- Minimum creditworthiness: 640
Universal credit
- Loan Amounts: $ 1,000 to $ 50,000
- Funding time: Within one working day after approval
- Minimum creditworthiness: 560
Update
- Loan Amounts: $ 1,000 to $ 50,000
- Funding time: Within one day of completing the required reviews
- Minimum creditworthiness: 560
upstart
- Loan Amounts: $ 1,000 to $ 50,000
- Funding time: Already on a working day
- Minimum creditworthiness: 580
How to get a personal loan
When it comes to personal loans, there is no one-size-fits-all solution. Here are some steps that can help you find the right loan for you.
- Prepare your finances. Some lenders work with bad credit borrowers, but having good or excellent credit will enable you to qualify for the best interest rates.
- Shopping spree. Many lenders allow you to check rates online without submitting a full application or hard loan application. Shop with different lenders to compare interest rates and terms.
- Use. Once you’ve found a good deal, follow the lender’s instructions to submit an application. Eligibility requirements vary from lender to lender, but you’ll usually need to authorize a credit check, verify your identity, and provide proof of income.
- Complete your loan. Once your loan application has been approved, the lender will send you the final loan agreement for signature. After you’ve signed the paperwork, the lender usually transfers the money to your bank account – often within a business day.
When looking for a personal loan, compare personal loan rates with Credible.
Further options for quick financing
Personal loans are not the only alternative to direct deposits to meet unexpected expenses. Here are a few others to consider.
- Credit cards – If you have good credit, you may be able to qualify for an interest-free credit card for a limited time. But even if you don’t qualify for a zero-interest credit card, a high-interest credit card is still likely to be cheaper than a direct loan.
- Pawn shop loans – Pawnbroker loans do not require a credit check. They 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 period of time, you will get your item back. However, be sure to read the fine print: Depending on state law, the effective annual interest on pawn shops can be over 200%.
- Cash advance apps – Many online and brick-and-mortar 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 rates. Many BNPL services do not charge interest as long as you make your payments on time.
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