Automatic Debit

Automatic debit summary: 

• Automatic debit is a way of making payments. Someone electronically withdraws money from your bank account.

• Before a company can use automatic debit to take money from your bank account, they must get your advance permission. Once you give your permission, the automatic debits can happen without any additional steps.

• Automatic debits typically happen on the same day every month, or they align with a payment deadline.  

• Payments can be made by automatic debit for a wide range of bills and purposes, such as installment loan payments, subscriptions, or memberships. 

Automatic Debit Definition and Meaning

Automatic debit is a way of making payments that lets you set up bills or recurring payments to automatically move money out of, or debit, your bank account. 

A debit happens when money is taken out of your account. Just like your debit card enables you to make purchases from your checking account, automatic debit lets you make payments. But instead of swiping a card or writing a check, automatic debit happens behind the scenes. It’s a way to make sure in advance that a money transfer will happen with no additional effort by you.  

Automatic Debit: How it Works 

Automatic debit involves setting up advance permission, or authorization, for a company to electronically withdraw money out of your bank account. Here are some examples.

Installment loans

If you have an installment loan that's due every month on the 15th, you can set up an automatic debit to pay your monthly loan bill. This is commonly referred to as auto-pay, and it’s one form of automatic debit. Lenders will work with you to set up automatic debit to pay your loans.    

Professional debt settlement services

When you’re in a debt settlement program, you’re usually asked to make a monthly deposit by automatic debit into a program account. The program account is set up by the debt settlement company to save up funds for settlement offers. 

Automatic Debit vs. Online Bill Pay 

Automatic debit is similar to online bill pay, but it’s not exactly the same. With online bill pay, you request that your bank send a payment for you, instead of your writing a check or entering card numbers into a payment portal.

With automatic debit, you agree to let a company request that money get moved out of your bank account. Online bill pay is a way of pushing money out of your account. Automatic debit is letting someone pull money out of your account. 

Key Components of Automatic Debit

Here are a few key aspects of automatic debit payments, and why they’re important: 

• Advance permission: With automatic debit, you agree in advance to authorize the payment. Companies aren't allowed to automatically withdraw money from your bank account without your prior permission. 

• Same or different amounts: Automatic debit payments can be for the same amount every time (such as a fixed payment on a debt consolidation loan) or for different amounts (such as a monthly utility bill that changes based on your home energy usage). 

• Discounts or bonuses: Some companies offer a slight discount or other perks as an incentive to sign up for automatic debit. 

Real Life Examples of Automatic Debit 

Automatic debit can be used for a wide range of bills and payments, such as: 

• Installment loans like car loans, student loans, or other recurring loan payments

• Bills for credit cards that allow automatic payments

• Utility bills like water bills, electric bills, or gas bills 

• Subscriptions like streaming services 

• Phone bills 

• Gym memberships