Traditional Banks

Banking Advance Deposit Loans



  • Most banks do not require a separate application for an advance deposit loan. They do, however, require a previously established personal checking account. We should note that relatively few banks offer advance deposit loans.
  • A customer opens a bank deposit account and schedules certain income payments for direct deposit (such as paychecks and government benefit payments).
  • Customers enroll in a bank’s advance deposit loan program by visiting a local branch or enrolling online or through an ATM. Once you enroll in an advance deposit loan program, you can request an advance at any time (no delay) against the funds to be deposited in your account on the next deposit cycle.
  • Banks routinely enforce a maximum advance amount (credit limit).
  • Because advance deposit loans are short-term credit vehicles, banks can be expected to provide a limited repayment period (a common limit is 30 days with a maximum of 35 days).
  • Early repayment causes the cost of the loan to rise. The fee that was charged remains the same regardless of when the loan is repaid.




Banks that offer advance deposit loans tend to use a similar pricing strategy. 

  • The required repayment period usually is about a month. Because repayment in full typically is required by the next account deposit, even a small transaction fee can produce a high annualized borrowing cost.
  • The amount of an advance plus applicable transaction fees will be deducted by the bank at the time of a customer’s next deposit of $100 or more.
  • The interest rate on advance deposit loans is usually a dollar charge per $100 of loan amount. This charge is called a transaction fee or cash advance fee.
  • Most banks charge a single fee on advance transactions. Among banks that make these transactions, the typical fee is $8-$10 per each $100 advanced.
  • If a customer fails to repay the advance and applicable fees by the 35th day, the bank can deduct the full repayment amount from the customer’s account using what the bank terms “automatic repayment.”
  • If the automatic repayment of a past-due advance overdraws the account, the bank can assess standard overdraft charges, unless the customer has some form of overdraft protection plan in place.

Among banks that make these transactions, the typical fee is $8-$10 per each $100 advanced. Using this fee as an example, a 30-day advance represents a periodic interest rate of 10% and an annualized index of borrowing cost of 120%. A 14-day advance would represent a much larger annualized index of borrowing cost (approximately 261%).

  • It is interesting to note that for some banks the fee does not change whether repayment is made one day after the advance or 35 days later. In the preceding example, a 10% fee assessed for only one day would produce an annualized index of borrowing cost of 3,650%.

While transaction fees are fairly consistent across banks several factors do vary, including eligibility requirements and limits on the number, frequency, and amount of advances.


What are they?

What are they?

Advance deposit loans – also known as “checking account advance” loans or “direct deposit advance” loans – allow a bank customer to borrow against the customer’s next paycheck, Social Security check, unemployment benefit or other eligible direct deposits into their account. In effect, a customer gains access to short-term advances against future bank deposits.

  • Banks promote advance deposit loans as an alternative to “payday lenders.” We should note that relatively few banks offer advance deposit loans.
  • Banks can be expected to caution customers who use advance deposit loans that these loans represent an expensive form of credit and should be used only to address short-term borrowing needs. Customers are advised to borrow only amounts they can afford to pay back out of their next direct deposits.
  • In a March 2005 revision to banking guidelines, the FDIC allowed member banks to offer what are essentially payday loans (although they were not called that). The FDIC wanted to ensure that this “high-cost, short-term credit product is not provided repeatedly to customers with longer-term credit needs.” The guidelines seek to limit the number of advance deposit loans banks can make per customer per year. The guidelines also discourage banks from making loans of this sort to customers with short-term consumer loans outstanding from other lenders for more than three months during any twelve-month period.

Some banks consider an advance to be a withdrawal against a line of credit, and not a loan. They contend that a bank is subject to essentially a negligible risk that an advance will not be repaid from a customer’s next deposit (or the customer’s full account if repayment is past-due). Still, the advance is secured by the customer’s account (and future deposits), much like a bank loan with collateral.


Bank Overdraft Solutions



According to a Federal Reserve rule that went into effect on July 1, 2010:

  • Banks cannot add new customers to overdraft protection programs without their consent; and further, existing customers who were added to a program prior to this date on July 1, 2010 were released from the program and given the option of rejoining.

In effect, depository institutions must first get permission of the customer to apply overdraft fees to debit card and ATM transactions (that is, customers must “opt-in” for this service). Without this “opt-in” the banks will simply decline payments on overdrafts.

Before the rule change, banks automatically enrolled customers in standard overdraft coverage plans. If an overdraft protection plan is preferred, a customer must to ask the bank to switch overdraft coverage; not all requests are honored.

The new “opt-in” rules apply only to debit card and ATM transactions. Banks may continue to enroll customers in standard overdraft coverage for checks and automatic bill-pay services (customers may or may not be able to opt-out from automatic enrollment).




Most depository institutions offer two overdraft solutions:

Standard overdraft coverage
The bank will cover an overdraft transaction for a flat fee (approximately $20 to $40). The fee will be assessed each time a customer overdraws their checking account. If the customer does not resolve an overdraft promptly (within a certain number of days), they may be subject to additional fees (“sustained overdraft” fees) at $5-$10 per day.

Further, banks may exclude certain transactions from overdraft coverage unless the customer previously requested these transactions be covered. Most banks limit the number of times an overdraft fee can be charged within a given time period.

Overdraft protection plan
The bank links a customer’s checking account to a “protecting account” (e.g., a savings account or a special line of credit). When checking account is overdrawn, the bank simply taps the customer’s “protecting account” for the overdraft amount.

Some banks still charge a service fee for this arrangement, but it tends to be less than the fees associated with standard overdraft coverage. The bank will honor the request for payment, so customers will not have to deal with payment requests declined for insufficient funds.


What are they?

What are they?

A customer overdraws their checking account by $100 on a debit-card transaction. 

  • They previously “opted-in” for the bank’s standard overdraft coverage. So:
    • The bank charges a flat fee of $30 for each overdraft. 
    • The bank covers the $100 overdraft and charges the customer $30 for the service. 
    • The customer now owes the bank the $100 overdraft, plus the $30 charge. 
    • The $30 charge represents a 30% rate on the overdraft amount. 

The bank may assess additional fees if the overdraft matter is not resolved promptly because the bank has advanced $100 to cover the overdraft. These additional fees can significantly increase the total cost of the overdraft.

With an overdraft protection plan, each time the customer’s checking account is overdrawn the bank simply taps the customer’s connected “protecting account” to cover the shortfall. Because the money in the “protecting account” is the customer’s own money – not the bank’s, no loan is involved in this transaction and the bank simply charges what amounts to a “service fee”. 

 Scenario 1 – Initial overdraft with no sustained overdraft charges  – $250.00

  • Amount of single overdraft – $250.00
  • Initial charge for single overdraft – $35.00
  • 5 days to resolve overdraft without additional charges
  • Annualized index of borrowing cost – 1,022%

Scenario 2 –  Initial overdraft with sustained overdraft charges – $250.00 

  • Initial charge for single overdraft $35.00
  • 5 days to resolve overdraft without additional charges
  • Additional daily charge for sustained overdraft – $9.00
  • 9 days (the maximum allowed) for sustained overdraft charges – $72.00
  • Maximum total overdraft charge – $107.00
  • Annualized index of borrowing cost- 1,115.9%


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