Teri Charest, a spokeswoman for U.S. Bank, says for customers to access the bank's Checking Account Advance, they have to be a customer for six months and have recurring deposits for at least two months. Charest says the product is designed for "unexpected, short-term borrowing needs." U.S. Bank has limitations as to how long the product can be used and tries to redirect customers to other credit alternatives or credit counseling when needed.
Cycle of debt
The downside of direct-deposit advances doesn't stop at the stiff fees associated with them. These types of loans can create a cycle of indebtedness because the bank gets paid automatically once money comes into the account, according to the National Consumer Law Center.
"If you have expenses the next day, you risk bouncing a check or triggering overdraft fees on top of the loan," says Saunders.
A study by the Center for Responsible Lending found borrowers of this type of loan are in debt for 175 days of the year -- or nearly six months -- even though it's designed to be a short-term loan product. What's more, nearly one-fourth of all borrowers are Social Security recipients. According to the Center for Responsible Lending, banks will loan up to half of a customer's monthly direct deposit.
"It leaves them with only 60 percent of their income to meet other basic necessities," says Standaert. As a result, consumers keep taking out loan after loan, she says.
Alternatives to direct-deposit loans
Consumers, even those who are struggling, have alternatives to direct-deposit loans. Fox says the first defense is to have an emergency savings account. If that isn't an option, accessing cash from an overdraft line-of-credit tends to have an interest rate of 18 percent, which is much lower than a direct-deposit advance.
While credit cards charge high interest rates for cash advances, Saunders says they're better than the interest charge on direct-deposit advance loans.
"Credit cards have a rate under 36 percent, and the minimum payments are smaller. It's a much better alternative," says Saunders, noting that consumers should avoid direct-deposit loans. "Even if you think you are desperate and need it right now, you'll just be in a worse position next month."