Deposit Advances: What You Need to Know
Many states have started to more tightly regulate or, in some cases, completely ban the practice of granting payday loans. It didn’t take long for some banks to see this as an opportunity and begin offering deposit advances to fill that void.
Though named differently and offered by what most would consider more trustworthy lenders, the terms, conditions and fees of deposit advances are very similar to those of payday loans. It’s important to remember that no matter what they’re called, this type of short-term lending can be the start of a cycle of high-cost debt that becomes very difficult, if not impossible, for borrowers to repay.
Here’s what you need to know about deposit advances.
How they Work
Generally a checking account with direct deposit is the only thing needed to qualify for a deposit advance. The consumer borrows a modest amount of money (usually less than $500). Then, the bank has the right to go into the account and pay itself back the amount, plus a fee, when the consumer’s next direct deposit hits.
Terms, Fees and Interest
Though terms and fees for deposit advances vary, there are reports of fees equaling the equivalent of up to 180 percent interest. But because the banks refer to it as a fee, rather than an interest rate, most consumers don’t make the connection. It’s a subtle game of word play on the banks’ part that keeps them from having to reveal the actual annual rate.
The Cycle of Debt
What’s most concerning about any type of short-term, high fee lending is the cycle of debt it can trigger. If a consumer consistently finds themselves short of making ends meet and continues to borrow money to do so, there’s little chance of ever catching up or saving for the future.
Before deciding on a deposit advance, consider other solutions to meet your short-term cash-flow needs, including:
- Applying for a small loan from a credit union
- Asking trusted family or friends for financial help
- Applying for overdraft protection on a checking account
- Getting a temporary or part-time to job to supplement income
- Selling unused items on eBay or Craig’s List