What Is Direct Deposit? How Does It Work?

Q: Does direct deposit go directly into your bank account?

Yes. With direct deposit, funds are transferred electronically from the payor’s bank account directly into your bank account.

Q: Can I direct deposit into another account apart from mine?

You generally can’t set up a direct deposit into someone else’s bank account. Banks typically don’t authorize deposits if the name on the deposit is not the same as the account owner’s name.

Q: Is direct deposit secure?

Yes. In fact, direct deposit is generally considered safer than getting paid via physical check, since it eliminates the chance that a paper check could get lost, stolen, or altered.

Q: Are withdrawals allowed in direct deposit?

After setting up a direct deposit with your employer, you can typically set up recurring withdrawals with your bank. If you know your direct deposit is coming on a certain date each month, for example, you might set up automatic transfer from your checking into your savings on the same day. This can be a good way to get into the savings habit.

What Is a Direct Deposit? How Does It Work?

Jacqueline DeMarcoUpdated February 7, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

It would be hard to find someone who doesn’t appreciate having money directly deposited into their bank account. This is why direct deposits are such a popular payment format. But what exactly is direct deposit and how does it work?Direct deposit allows your employer to send your pay straight to your bank account so you don’t have to deposit a physical check after each pay period. Read on for a closer look at how direct deposit works, including its pros and cons, how to sign up for direct deposit, and how long it takes to access your money.

What Is Direct Deposit?

Direct deposit is defined as a payment method that involves the electronic transfer of money from one bank account to another instead of using a physical check deposit. Direct deposits are common with employers, since it saves them from having to print and mail checks to their workers. It also benefits employees. since it saves them from having to deposit their paychecks into their bank accounts every pay period.While direct deposit is most commonly associated with paychecks from employers, direct deposit may also be used for tax refunds and other types of payments.

How Does Direct Deposit Work?

With direct deposit, money is transferred from one bank account to another through the Automated Clearing House (ACH), which is an electronic funds-transfer system that facilitates payments between banks throughout the U.S. Because the money is transferred electronically, your checking or savings account is credited automatically. Unlike with a paper check, there is no need to wait for the money to clear.To receive a direct deposit, you typically need to sign up with your employer or whatever organization is paying you the funds (the IRS, for example, if you’re receiving a tax refund). You can typically choose whether you want the money to be deposited into your checking account or your savings account. In some cases, an employer may allow you to divide your direct deposit between multiple accounts. For example, you might request that 80% of your paycheck go into your checking account and 20% get directly deposited into a high-yield savings account. This can be a great way to automate — and grow — your savings.Once you fill out the paperwork, it can take anywhere from a few days to a few weeks for direct deposit to kick in. Depending on how often you get paid, you may have to continue receiving paper paychecks for one or two pay periods.Recommended: Guide to Opening a Savings Account Online

How Long Do Direct Deposits Take?

The direct deposit process can take, on average, one to three business days. Exactly when you’ll see the funds added to your bank account will depend on when the payor initiates the payment. For example, many employers set up their payroll software so that employees get their direct deposit on their exact pay date. To do this, they may initiate payment a day or two before that date to allow time for the ACH transfer process. Once the funds are credited to your account, though, you can typically access them immediately.

Benefits of Direct Deposits

Direct deposit has a lot of advantages over payment via physical check, both for payors and payees. Here’s a look at some of its biggest pluses.

Convenience

Direct deposits are a convenient form of payment. The payor doesn’t have to bother with printing checks and making sure they get to the recipient. The payee gets the money without having to take the time or effort to deposit a check into their bank account.

Faster and Safer Transactions

With direct deposit, you don’t have to wait to get a check in the mail, or for the check to clear after you deposit it into your account. The funds transfer quickly and once the transfer is complete, the money is available for use. Direct deposit is also a safe method of transferring money. With no paper checks involved, there is no risk of a check getting lost, stolen, or altered.

Banking Perks

Many banks offer special benefits to customers who set up a recurring direct deposit into their accounts. For example, the bank may waive monthly maintenance fees or offer a higher annual percentage yield (APY) on linked checking and savings accounts. Some banks even offer early access to your paycheck.Recommended: What Is a Clawback?

Drawbacks of Direct Deposits

There are, however, a few drawbacks to direct deposits. Here are two to consider.

Cybersecurity Threats

While check fraud is not a consideration with direct deposits, there are some online security risks with any form of electronic payment. Banks and credit unions typically work hard to protect employee’s financial and personal data but cybercrimes can still potentially occur.

Changing Banks Is More Complicated

If you switch to a different bank, you’ll have to fill out a new direct deposit authorization form with your employer. In addition, you’ll need to keep your old account open until the new account starts getting direct deposits, which could take a few weeks.

Tips for Setting Up Direct Deposit

To set up a direct deposit, you typically need to fill out a direct deposit form and supply a voided check (which is simply a check you write “VOID” on in large letters so that the check can’t be used). Here is the information you’ll likely need to provide:

Bank name
Bank address (you can use the address of any branch you use)
Bank routing number
Bank account number
Type of account (such as checking or saving account)
Account holder (or holders) name (or names)

You can find most of this information on one of your checks. Typically the routing number is printed on the front of the check on the bottom left side; the account number is usually just to the right of the routing number. You may also be able to find this information by logging into your account online.

Other Things to Consider About Direct Deposit

While direct deposit is most commonly associated with paychecks, it’s also used in a number of other situations. For example, you can get a tax refund via direct deposit instead of a check. If you choose this option, you can often get your refund within a few weeks of when you file your taxes. Here are some other scenarios where you may have the option of direct deposit:

Investment-related dividends
Retirement account payments
Social security benefits
Unemployment benefits
Child support payments

Recommended: Depositing More Than 10k: What to Know

The Takeaway

Direct deposit is a quick and safe way to receive your paycheck (as well as some other payments), and you can typically choose whether you want the money to go directly into your checking or savings account. You may even be able to split up your paycheck, with most going into checking and a little into savings each pay period, which can help you grow your savings without even thinking about it.If you’re looking to earn a competitive rate on your direct deposits once they hit the bank, Lantern by SoFi can help. With our online banking marketplace, it’s easy to compare high-yield savings accounts based on APY, fees, and balance minimums.Lantern can help you compare online savings accounts and find today’s best rate.

Frequently Asked Questions

How long does it take to set up direct deposit?

Does direct deposit go directly into your bank account?

Can I direct deposit into another account apart from mine?

Is direct deposit secure?

Are withdrawals allowed in direct deposit?

Photo credit: iStock/champpixs

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About the Author

Jacqueline DeMarco

Jacqueline DeMarco is a personal finance writer and editor based in Southern California. While she spends the bulk of her time writing about complex financial issues, she also tackles a variety of subjects ranging from food to fashion to travel. Her work can be found across dozens of publications such as Credit Karma, LendingTree, Northwestern Mutual, The Everygirl, and Apartment Therapy.

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