How direct debits and standing orders work | allthelenders
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How direct debits and standing orders work

Direct debits and standing orders alike are two of the most common ways in which people make regular and reoccurring payments to other people or companies. It is an especially common way to pay rent, if it is the same amount each month. In this guide brought to you by allthelenders, we are going to be looking at how they work, as well as the differences between the two.

Standing Order

These are the key features of a standing order:

  • Set up online or via the phone
  • Fixed amounts
  • An instruction to your bank to pay into another bank account
  • Used to pay fixed costs such as rent to a landlord
  • Pay an amount you choose, not the amount you owe
  • Pay to individuals and their personal bank accounts
  • Can pay between your different accounts. For example, into a savings account each month from your current account.
  • No charges
  • Used for charity donations, rent and insurance

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A standing order is a way to make recurring payments each week, each month or each year. How much the payment is will be based on the amount you have set it to and the date you have set it to be taken out.

A difference between a standing order or direct debit is that you are going to be setting a fixed amount with a standing order, whereas a direct debit can be any amount at any time.  So, you will be paying say, £500 in rent per month – you would set up a standing order to your landlord since this amount will not change month to month and will be due on a certain day.

Another good use for standing order other than rent is paying back individual bank accounts. This could include sending the person in your household who deals with bills you share each month, or you could send a family member a set amount of money each month. It could also be to pay for your subscriptions such as Netflix or Spotify.

As detailed above, standing orders are free of interest charges and free to set up. It will be your responsibility to check that the amount is correct and still going out each and every month to the correct recipients.

Direct Debits

These are the key features of a direct debit:

  • Set it up via the phone or online
  • Variable amounts – you can specify the amount each time e.g gas, electricity
  • Allows an organisation to be able to take money from you
  • Can be used to pay a certain amount to someone you owe money to or a company can take different amounts each month
  • Companies are required to give you 10 days’ notice before they take any payments
  • Can be used for paying bills, such as electricity, gas and other utilities
  • No charges

Direct debits are the most common type of way to make regular payments, more so than standing orders. Even though it is called a direct “debit” you can actually set up a direct debit out of a debit card as well as a credit card. It is all dependant on what you are paying for.

By setting up a standing order, you are allowing an organisation to take payments from your debit or credit card upon a scheduled date. You must give the bank permission to do this.

A key difference about direct debits is that they are a variable amount, meaning that the repayments can differ month to month or they can be a one-time thing also. A great example to explain the varying amounts is your phone bill as this is likely to be different each month depending on your usage. Therefore, a standing order is no appropriate for this sort of thing as you may be over paying or under paying.

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Just as with a standing order, direct debits are completely free to use. You can also rest assured that your bank will be overseeing your payments and will flag anything which seems off to them.

Do loans use standing orders or direct debits?

Mortgages will take direct debits but for most loan companies and payday loans companies too, they will use a process called Continuous Payment Authority which is a form of recurring payment so that lenders can collect automatically from your account, every month, on the agreed date. This saves you having to call up, go to the bank or make a manual repayment each month – the lender just collects it automatically.

The amount which will be collected may vary month to month, so it is more similar to a direct debit in a way and the lender will have to give you notice before they take the funds, usually by email or SMS.

You can cancel a direct debit at any point, however this is not possible with a continuous payment. You do have the right to contact your bank directly to stop the payments, but it is important to communicate with the lender to avoid any additional fees.