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How Do Direct Deposit Loans Work?
Direct deposit loans get their name because you can get money directly deposited into your bank account, usually within 24 hours of applying. However, loans marketed this way are also generally considered payday loans, which come with steep rates and fees.
Applications are generally quick and only require you to have a job, an ID and a bank account. These lenders don’t often run credit checks on borrowers.
Direct deposit loans are generally for small amounts (usually less than $1,000) and short terms, often due by your next payday (hence the name “payday loans”).
Many people use direct deposit loans when they are short on cash for basic expenses, such as food, rent or a car payment. While this might sound like a good idea, the high interest rates and fees of these payday loans often send cash-strapped borrowers into a downward debt spiral that is difficult to climb out of.
The Downsides of Direct Deposit Loans
These loans are often targeted at people with low income, poor credit history or both. In many cases these borrowers have difficulty getting credit from other sources.
Although these loans have very short terms (usually two to four weeks), direct deposit loans are often unsecured, meaning they’re not backed by an asset such as a car or a house. This makes these loans very risky for lenders. They offset this risk by charging fees and interest rates that can compound daily.
Rates for these loans may also appear low (often between $8 and $25 per $100 borrowed), but this can translate to nearly 400% per year – well above the rate of most other forms of credit.
The risks compound if you’re not able to pay back the direct deposit loan right away. A study from the Consumer Financial Protection Bureau showed most of these loans are renewed or rolled over (four out of five), pushing the repayment back and the interest up. The debt then becomes harder and harder for you to repay as fees mount.
The Best Alternatives to Direct Deposit Loans
There are alternatives to direct deposit payday loans for times when you urgently need cash. Here are a few savvy ways to help out your wallet when you get in a bind.
Personal Loans
A personal loan is typically an unsecured fixed-rate loan, paid back with equal monthly payments over a period of one to seven years. These loans have more favorable terms and interest rates than you’ll find on direct deposit loans.
Personal loans are offered by both brick-and-mortar banks and credit unions, as well as online lenders such as LightStream and SoFi. The average interest rate for these loans was around 12.17% as of August 2023, according to the Federal Reserve, which is considerably less than credit cards or payday loans.
While the application process isn’t instant, you can often receive funds within a few business days if you choose an online lender. As they are usually for larger amounts than direct deposit loans (a few thousand dollars or more), they often come with loan origination and other fees. Because of this, personal loans are best suited for large expenses that you plan to pay back over a long time, such as necessary home repairs.
If you have fair credit, our review team compiled a list of the best fair credit personal loans.
Credit Union Payday Alternative Loans (PALs)
If you’ve been a member of a federal credit union for at least a month, you may qualify for a payday alternative loan. These loans have many of the advantages of a payday loan (like a quick approval process for a small amount of money), but they have more consumer protections. For instance, the repayment terms of PALs are between one and six months, the interest rate is capped at 28% and application fees cannot exceed $20, according to the National Credit Union Administration.
How much you qualify for, as well as the loan qualification criteria, will vary from lender to lender. You generally cannot borrow more than 20% of your total net worth in PALs. If you’re already a member of a federal credit union that offers these loans and you’re in a jam, PALs are definitely preferable to a commercial direct deposit loan.
Peer-to-Peer (P2P) Lending Programs
Instead of borrowing from a bank, you may want to look at peer-to-peer lending. With peer-to-peer lending, you use an app to borrow from a group of other people. This style of lending arose to meet the needs of people who wanted to borrow money but fell outside the required criteria of a typical bank loan.
Interest rates on these loans range from 6% to 36% and vary based on your credit score, how much you want to borrow and your desired repayment terms. These loans typically have an origination fee, which eats into the amount you receive. Lenders also generally look for credit scores of 600 or more, so if you have poor credit, peer-to-peer loans may not be the best option for you.
Credit Card Cash Advance
While they’re expensive, a cash advance from your credit card may be more advantageous than a direct deposit loan. You can usually get a cash advance from an ATM with your credit card, so you get the cash fast without waiting for a direct deposit to drop.
A credit card cash advance typically requires you to pay a fee of about 5% of the advance amount. The interest rate will be high, as well, but it will be lower than that of a payday loan.
However, if you’re already maxed out on your credit cards or if your credit score is so low that you haven’t been approved for a credit card, this option may not be available to you.
Community Assistance Programs
If you’re struggling to put food on the table or keep the lights on, you’re not alone. Community assistance programs, churches, food pantries, charities and other organizations can help reduce these financial burdens without saddling you with crippling debt.
Do an internet search for your specific need (such as “help with rent in Jones County”) or call 211 or search the National Resource Directory database to find out what resources are available in your community.
Government Assistance Programs
Certain government programs are available to families and individuals who need help getting back on their feet financially. Benefits such as food stamps — or the Supplemental Nutrition Assistance Program (SNAP) — and Medicaid are available for people with low incomes who need help with food and medical coverage. Lifeline is a program that helps pay for phone or internet service, and HUD Section 8 vouchers can help you find an affordable place to live.
These programs can be helpful if your income is low enough to qualify, but they all take time to apply and be approved for, so this may not address your short-term financial needs.
Employer-Based Salary Advances
If you have a good relationship with your employer, you may be able to convince them to give you a portion of your salary in advance, before your next paycheck. Salary advances don’t have the interest charges that loans do, and they’re just as convenient as direct deposit loans.
Your employer also might have a daily pay option, giving you access to wages for hours you’ve already worked. Not all employers offer this, and early withdrawals usually come with a convenience fee.
A salary advance or daily pay is a good option for urgent, small- to medium-sized bills that need immediate attention but don’t warrant taking on the crazy interest rates of a direct deposit loan. Talk to your HR representative or supervisor to see if your employer offers these options.
Nonprofit and Credit Counseling Services
These organizations are staffed by financial professionals who can help you figure out a path to debt freedom. They don’t lend money, but they can help you with things like making a budget, teaching you about consumer credit and coming up with a personalized plan to pay down your debts. Reach out to the Financial Counseling Association of America or the National Foundation for Credit Counseling to connect with a debt counselor who can help.
The Bottom Line
When you get slammed by financial headwinds, rest assured that direct deposit loans aren’t the only option to deal with your troubles. There are a variety of alternative ways to get your hands on cash fast so you can meet your obligations.
Options such as personal loans, credit card cash advances and community assistance aren’t as fast or convenient as applying for a loan and getting funds the same day, but you’ll avoid the dangerous drag of high-interest debt on your finances if you can steer clear of direct deposit loans.
If you find yourself with no viable alternative to a direct deposit payday loan, reach out to a credit counselor or community assistance program before disaster strikes again. These volunteers are trained to help people like you dig out of debt and get on the path to financial stability.
Frequently Asked Questions About Direct Deposit Loan Alternatives
Whenever you borrow money, by definition, you are taking out a loan. Some ways to get quick cash without borrowing it are to sell something you own to a consignment shop or on Facebook Marketplace, use daily pay (if your employer offers it) or cash in any gift cards or credit card rewards you haven’t used.
Some payday lenders will loan money even if you don’t have a bank account for a direct deposit. In those instances, they will issue you cash.
Pawn shop loans (where you put up an item of value as collateral) and payday loans are some of the easiest loans to qualify for. Lenders often approve borrowers in a few minutes without a credit check. However, these can come with very high interest rates and should likely be avoided.
Many lenders specialize in personal and other loans for borrowers with bad credit. So even if your credit score is low, you can probably find a lender to approve you for a loan. However, it’s important to look at your finances as a whole and ask yourself whether a loan will help or hurt your financial well-being. If you have bad credit, the best type of loan is one you’re sure you can repay.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someoneyou trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
If you have feedback or questions about this article, please email the MarketWatch Guides team at [email protected].
