Payday loans and deposit advances are both short-term loans with high costs. The major differences between them are who makes the loans, how the loan is requested, and how the payment is made.
Here is a quick look at the differences between payday loans and deposit advances:
| Payday Loans | Deposit Advances | |
| Loan Provider | Depository institutions | Banks or credit unions |
| Loan Term | Must be repaid on your next payday, typically 2-4 weeks | Do not have a predetermined repayment date |
| Payment Method | Vary by the lenders | Electronic deposit |
| Credit Requirement | Bad credit friendly | Good credit preferred |
A payday loan is marketed as a closed-end loan offered by some depository institutions to help borrowers bridge unexpected financial shortfalls between paychecks and resolve their emergency problems. It is typically structured as a lump sum of the amount borrowed plus other costs to be repaid on the borrower’s next payday or receipt of their monthly income.
Payday loans may be repaid at the lender’s storefront, via a post-dated check or a pre-authorized electronic debit of the borrower’s deposit account. Eligibility to apply for a payday loan is usually based on a borrower’s monthly income and debt-to-income ratio, which gives a wholesome idea of how affordable the loan is to the borrower.
On the other hand, deposit advances are offered by banks or credit unions to some deposit account holders with recurring electronic deposits, for instance, a direct deposit of their paycheck into their bank account. One can request a deposit advance in person at a banking hall, over the phone, or via an online banking app.
Unlike payday loans, deposit advances do not have a predetermined repayment date. Instead, customers and lenders have a mutual understanding that repayment will be automatically deducted from the former’s next qualifying electronic deposit.
Usually, the bank or credit union repays itself from subsequent deposits if the incoming deposit amount is not enough to cover the cost of the loan. They may also charge the borrower’s account - even if it causes the account to be overdrawn - if any loan balance remains after 35 days.
A payday loan is usually due to being repaid by the borrower’s next payday, usually 2-4 weeks from the day the loan was requested. The repayment date is usually clearly stated in the agreement, and the borrower can either allow the lender to withdraw funds from their checking account when the loan is due or return to the payday lender’s storefront to repay the loan.
Payday lending is a comparatively greater credit risk to the lender than a deposit advance. This is because payday lenders are only privy to very limited information with which they can assess the borrower’s likelihood of repaying the loan. Deposit advance lenders, in comparison, have some insights into how money flows in and out of the applicant’s account and can assess their eligibility based on this information.
Payday loans and deposit advances charge fixed fees, usually higher than what’s charged on many other types of loans. You may find cheaper alternatives if you have a good credit score. Otherwise, they may be the best option you’ve got.