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Direct Deposit Loans: Types, Pros and Cons

Jamie Cattanach • February 23, 2024

Woman reviewing direct deposit loan options on tablet

Many Americans live paycheck to paycheck, so it’s no surprise that direct deposit loans appeal to many.¹ A type of payday loan, direct deposit loans offer borrowers fast cash delivered directly to their bank accounts. Unfortunately, that convenience can come with considerable costs.

Here’s what you need to know about direct deposit loans, including their various types, pros, cons, and alternatives.

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Direct deposit loans explained

Direct deposit loans are unsecured payday loans that can be used to meet most financial needs you may have. Some people use these loans to cover basic living expenses, like groceries and bills, if their money dries up before payday hits.

The funds from direct deposit loans can potentially reach your bank account on the same day. In some cases, lenders may be able to disburse direct deposit loans in minutes. However, as a type of payday loan, direct deposit loans can have exorbitant interest rates that can decrease the borrower’s financial stability in the long run.

Because direct deposit loans may be for relatively low amounts – say, $500 or $1,000 – and because borrowers generally need the funds as quickly as possible, paying a fee of $75 or $150 may seem reasonable. But when you do the math, payday loan interest rates can be as high as 400% APR or even higher.² As a comparison point, some credit cards are available with interest rates of less than 20%, and some personal loans carry rates as low as about 7% APR for borrowers with excellent credit.3,4

In short, loans with same-day direct deposit or instant deposit loans may solve an immediate finacial problem but have the potential to create more serious financial problems long-term.

Set up direct deposit with Chime to get paid up to two days early.*

Types of direct deposit loans

Although all direct deposit loans result in money deposited directly into your bank account – just as their name implies – there are a few different types of direct deposit loans to choose from.

  • Installment loans are loans that are disbursed in a lump sum but then paid back in installments – regular monthly payments of a set amount – over time. These payments will include both the principal or the loaned amount and any fees or interest accrued along the way for the service of the loan.
  • Lines of credit may also be available as direct deposit loans, but they work a little differently. Rather than getting a lump sum deposited into your bank account, you’ll be approved up to a certain spending limit, which will be available in an account you can draw from so long as you don’t reach the maximum. You may be able to request more credit as you pay back what you’ve borrowed, and you’ll only pay interest and fees for the funds you actually borrowed (rather than all you’re approved for).
  • Title loans are the exception to the rule when it comes to direct deposit loans because they’re secured loans, where most of the rest are unsecured loans. In other words, you (the borrower) have to put an asset up for collateral (like your car) to lower the risk level for the bank.This basically creates an insurance policy for the lender: If you can’t repay the loan, the bank can seize the car to make up for their losses. Because they are secured, these loans are sometimes easier to qualify for if you have poor credit.
  • Cash advances are loans offered against your own paycheck. Many online companies offer cash advances that pay small amounts of money (usually between $200 and $500) and then automatically settle the loan (i.e., withdraw the amount you borrowed plus any fees directly from your bank account) on your next payday.
  • Credit card cash advances are similar to other cash advances, except instead of leveraging your next payday, you leverage an existing credit card account to access the money. Many credit cards offer cash advances as part of their terms and conditions, and accessing cash is as easy as inserting your card into an ATM. These cash advances can have interest rates even higher than regular credit card interest rates, which already regularly push 20% APR. Unlike other credit card purchases, interest on credit card cash advances starts building immediately (rather than at the end of the grace period).

Direct deposit loans: Pros and cons

Like any other financial choice, direct deposit loans have both benefits and drawbacks to consider.

Pros

Quick approval and funding process

The most appealing thing about direct deposit loans, for most borrowers, is their speed: Some direct deposit loans may make the borrowed money available in your bank account the same day you’re approved for the loan.

A hard credit check is rarely required

Many direct deposit loans don’t require a “hard” credit pull – or, in some instances, any credit check at all – to qualify borrowers. This makes them more attractive to people who have certain financial histories.

Unsecured loans don’t require collateral

The majority of direct deposit loans are unsecured, meaning no collateral is required to get them.

Cons

High interest rates and associated fees

Convenience and availability without a credit check come at a cost: namely, much higher-than-average interest rates and loan servicing fees, which can make a financially unstable situation even worse.

Shorter repayment periods than other loan types

While other types of loans, like personal loans or auto loans, may give you several years to repay what you owe, direct deposit loans’ terms are usually quite short. The full amount plus interest will often be due on your next payday. This dynamic gives borrowers less chance to save up the money they need to repay their debts.

In the case of title loans, risk of asset loss

Even when things get bad financially, putting yourself at risk of losing collateral like your car is not a decision to be taken lightly. Carefully consider the risks of taking out loans against collateral like your car, both on your daily life if you lose the asset and toll it would take on your finances.

What is the difference between direct deposit loans and personal loans?

Direct deposit loans and personal loans are similar in many ways: Both offer borrowers money without the security of collateral. These days, many personal loans also deposit the funds directly into the borrower’s bank account.

But there are important differences between direct deposit loans and personal loans, too:

  • Personal loans generally come in larger amounts than direct deposit loans – sometimes as much as $50,000 or $100,000 rather than $200 or $500.
  • Personal loans have longer repayment terms. Borrowers might repay a personal loan over the course of five, seven, or even 12 years, rather than in weeks or months.⁵
  • Personal loans have a more in-depth approval process, which can also take longer than direct deposit loan approval. Personal lenders generally require thorough credit checks and may be harder to qualify for than direct deposit loans, which may make them inaccessible to some borrowers.

How can you apply for a direct deposit loan?

Many direct deposit loan lenders conduct their business online, which means applying for one of these loans can be as quick and easy as filling out some forms. You may also still be able to apply for direct deposit payday loans at storefront locations.

Although your lender will guide you through their specific process, here are the general steps.

1. Find a legitimate lender (and look for the best rates)

The first step toward applying for any loan is determining who your lender is. In the case of direct deposit loans, chances are you will encounter higher-than-average interest and fees no matter which lender you go with. However, it’s still important to do some research to ensure the lender is legitimate and has a fairly decent reputation.

2. Complete your application

Your lender will provide you with an application, which will ask for information like your name, date of birth, address, income information, and more. This application is used to determine how much of a loan you’re eligible for, as well as determine your precise interest rate, loan term, and fee schedule.

For the direct deposit to go through, you’ll also need to provide your bank details during this stage.

3. Wait for approval

Even direct deposit loans usually aren’t literally instant. Your application will need to be processed and approved, which may take a few minutes, hours, or business days.

4. Receive your money

Once your application has been approved, you’ll receive the funds you’ve borrowed as a direct deposit into the bank account you’ve provided. Now, all you have to do is spend the money and repay it back, along with interest, on time.

Applying for direct deposit loans without a bank account

Because direct deposit loans are all about getting the loan directly deposited into your bank account, having such an account is a crucial step toward applying for one.

However, in some instances, you can apply for a similar type of small, short-term loan without a bank account and have the funds paid out to you in cash. You usually need to visit a payday lender’s physical storefront to do this.

Direct deposit loans are swift, but sticky

Direct deposit loans may seem like a quick fix to financial troubles – but (no) thanks to their high fees and short repayment periods, they can easily make your money woes worse.

Fortunately, getting out of debt is possible with hard work and dedication. Check out our top guides on managing debt.

Fee-free overdraft

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  • Get spotted on debit and credit purchases
  • Temporarily increase your SpotMe® limit with Boosts^
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¹ Information from CNBC's "62% of Americans are still living paycheck to paycheck, making it ‘the main financial lifestyle,’ report finds" as of January 16, 2024: https://www.cnbc.com/2023/10/31/62percent-of-americans-still-live-paycheck-to-paycheck-amid-inflation.html

² Information from Consumer Finance's "What is a Payday Loan?" as of January 16, 2024: https://www.consumerfinance.gov/ask-cfpb/what-is-a-payday-loan-en-1567/

³ Information from Bank of America's "BankAmericard® Credit Card" as of January 16, 2024: https://www.bankofamerica.com/credit-cards/products/bankamericard-credit-card/

⁴ Information from Upstart as of January 16, 2024: https://www.upstart.com/

⁵ Information from LightStream as of January 16, 2024: https://www.lightstream.com/

* Early access to direct deposit funds depends on the timing of the submission of the payment file from the payer. We generally make these funds available on the day the payment file is received, which may be up to 2 days earlier than the scheduled payment date.

~ SpotMe® eligibility requirements apply. Overdraft only applies to debit card purchases and cash withdrawals. Limits start at $20 and may be increased up to $200 by Chime.

^ Boosts are available to eligible Chime members and are subject to max limits. See SpotMe® Terms and Conditions.

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