Wednesday, August 15, 2012

Do Payday Advances Use Your Savings Account?

People who need a short-term loan will often seek out payday loans. Payday loans are loans the borrower must pay back within a short period of time, generally several days to a month. The borrower also typically pays a high interest rate. When taking out the loan, the borrower must provide the lender with some form of payment in advance. This payment is usually drawn from the individual's checking account, not his savings account.

Payday Loans

    When a person takes out a payday loan, the lender will usually require that he provide a bank account from which the lender can draw the money when it is due to be repaid. The person will generally offer the lender either a personal check, post-dated for the date of repayment, or an account number. On the day the loan comes due, the lender will cash the check or draw the money out of the account.

Checking Account

    While savings accounts may have restrictions on when and how a person can withdraw money, money can be easily drawn out of and placed into checking accounts. Unless the person pays for the loan by taking cash out of his savings account, most payday loans will not be paid for using a savings account.

Overdraft Protection

    In some cases, money might be indirectly drawn from a person's savings account if the person's checking account does not have enough money to cover the withdraw. If the person has overdraft protection on his account, then money may be automatically taken out of his savings account to cover the amount of the withdrawal. However, money will not come directly from the savings account and will only be routed in this way if the account holder authorizes it.

Considerations

    Theoretically, a payday loan company could eventually attempt to take money out of a borrower's savings account if the loan goes delinquent. If the borrower fails to pay the loan back, the company may file suit against him in court for breach of contract. If the company wins and is awarded damages, it may seek to freeze the person's bank account and extract money out of it to cover the loan amount.

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