Finance Globe

U.S. financial and economic topics from several finance writers.
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Checking Account Advance Only Slightly Better Than Payday Loans

Several major banks now offer a short-term loan product similar to payday loans. If you have a checking account in good standing with direct deposit, you may qualify for a checking account advance or direct deposit advance. You avoid the stigma of going to a payday loan store and the advance is repaid automatically with your next direct deposit or with 35 days.

If your bank offers the service, you may find a link to request the advance on the same page that you check your balance information. Or, you can call the bank to request an advance. The advance doesn’t require a credit check, which means you can borrow the money even if you have bad credit. However, if your account has been levied, is in collection, or is under another type of court-ordered block, your advance may be denied.

You can typically borrow a maximum of $500 unless your limit has been reduced for overuse or because your direct deposit amount is low. If want to take an advance on an account with a negative balance, you must at least advance enough funds to cover the overdraft.

Fees on a checking account advance are only slightly better than payday loan fees. The typically fee between $5 and $10 for every $100 you borrow versus an average fee of $17.50 to borrow money from a payday loan store.

Depending on the bank you may be able to repay the loan in installments. So, rather than having the entire balance deducted from your next deposit, only a portion would be deducted from each direct deposit until you’ve repaid the advance in full. You still have to repay the balance within 35 days if you make installment payments.

Using a checking account advance, you could run into the same problems that payday loan borrowers encounter – getting trapped into the loan. Because the bank will automatically deduct the advance plus fee from your next deposit, you’ll have less money to pay your regular expenses. Unless you can figure out how to live without the $300 or $500 you just paid back to the bank, you might have to take out another advance and another until the bank reduces your advance limit or stops access completely.

Don’t use the checking account advance like a credit card that you can use, repay, and reuse. It’s expensive. If you borrow $500 every month for 6 months, you could pay up to $300 in fees.

The service may not be available in your state. So check with your bank before deciding this is the solution to meet your short-term needs.

Before you go this route, explore your other options. Do you have money in a savings account that you can use? It’s free to withdraw money from a savings account (unless you’ve exceeded the allowed number of withdrawals for the current statement period.) Can you make the purchase on a credit card? Generally, you’re not supposed to charge what you can’t afford to repay. But, the interest on a $500 credit card transaction would be much cheaper than the fee you’d pay on a checking account advance. Can you get an advance from your job? Borrow from a friend or relative?

A checking account advance is easy enough, but it’s expensive. If there’s a cheaper way to borrow money, put your pride aside and take it. Then, once you’ve repaid your short-term loan, start putting money in a savings account so you’ll have an emergency fund to use for these types of unexpected expenses.
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Monday, 19 August 2019

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