What is the difference between a standing order and a direct debit?

What is the difference between a standing order and a direct debit?

Standing order and direct debit are two terms you have probably come across many times, as they are the two most common methods to make regular or recurring payments to either individuals or companies. In many respects they are similar but their difference is crucial as these details may make one option far more appropriate to your particular needs.

Standing order overview

standing-order

There are a number of factors you should take into consideration when it comes to choosing a standing order.

  • Can be set up either on the phone or online
  • Operates in fixed amounts
  • It functions as an instruction to the bank to pay another bank account
  • You choose the amount you are paying, you make a standing order when you don’t owe a fixed amount
  • Can be used to pay individuals and their respective bank accounts
  • You can pay using your different accounts
  • There are no charges attached
 

Direct debit overview

  • Can be set up either on the phone or online
  • Works as variable amounts
  • Allows an organisation to repeatedly take money from you
  • The amount the company takes from your account each month is liable to change
  • A company whom will be taking money from your account has to give you up to 10 days notice before they take the payment
  • Is commonly used for paying bills such as gas, electricity, making payday loan repayments and other utilities
  • There are no charges attached

Standing Orders Explained

A standing order is a recurring payment each week or month, dependent on your preference of a fixed amount you have decided and on a particular date you feel comfortable with and which suits all parties involved. The most significant difference between the standing order and direct debit is that you have control over the fixed amount you are paying and at what intervals. This places control in the hands of the individual and allows you to interact with your finances in a responsible and personal way. Standing orders are great for payment such as rent because you know that the amount is fixed and at what intervals it needs to be paid. For payments which fluctuate constantly such as utility bills a direct debit (unless you are on a payment plan) might be more appropriate. Standing orders are also useful in that they give individuals the space in which to send money to other individual bank accounts. This means that you can either send a fixed amount to another individual (Parent to child allowance) or from one account to another. In similarity with a direct debit, you have the security of your bank or building society. Standing orders can be organised by your local bank branch, by post or through telephone or online banking schemes. Standing orders are free to set up, considering the personal control that is placed your hand with a standing order you need to agree on amounts that suit you and to reorganise these if they no longer suit you.  

Direct debits explained

direct-debit

We explain what direct debits entail.

Direct debits are the most common way to be making repayments, and regardless of the name, you are able to make direct debits on either a debit card or a credit card. Direct debits are used to organise payments to another organisation to whom you are either dealing with or are a customer of. Rather than having to call up each week and organise payments you can establish with a direct debit a regular set of automatic repayments which can be organised in a variety of ways (telephone, by post or online).

Some common uses of direct debits will be for things such as:

  • Paying a mobile phone bill
  • Paying utility bills
  • Subscriptions such as Sky, Netflix or your gym
By organising a direct debit you allow a company or organisation to take payments from your debit or credit card on an arranged date. You have to give permission for this to happen, the company is not simply allowed to remove money from your accord. As set out in the respective regulation, the company must inform you of the date upon which the payment is being taken. It is important to remember that with direct debits the amounts that can be removed from your account are variable. There are no charges for the use of a direct debit in fact companies far favour this system so you may even be offered a small discount!  As is the case with a standing order you are protected by your bank so that if anything goes wrong the Direct Debit Guarantee Scheme from your cardholder will be able to refund you. Whilst the amounts do change each month potentially with a direct debit it is important that you still check your bank statements to make sure you are not being overcharged.

Be Aware

Do not confuse direct debits and standing orders with Continuous Payment Authorities (CPAs). These should be avoided strictly as they give permission to companies such as payday lenders or certain subscription services to take the money they think you owe them when they think that they’re owed it. If you have arranged some standing orders, direct debits or future dated payments to be coming out of your account, the newly arranged ‘retry’ process might help you to avoid fees. This essentially means that if a payment is not able to be made because of insufficient funds you have until 2 pm of that day to place funds in your account to cover the payment and avoid a fine.  

Do loans use standing orders or direct debits?

By and large, companies who handle loans do not use standing orders or direct debits that use instead of a process called the Continuous Payment Authority. This is a method whereby recurring payments from the lender are verified during the application stage and then are able to be collected from your debit account only on a given date. This system is similar to a direct debit as the lender has to provide notice before taking any payments. Unlike direct debits and standing order you cannot ask the continuous payment authority to cancel you have the right to cancel but this has to go to your bank. The only reason that there could or should be for cancelling is that you are stopping the repayment of your loan. This is the system used for loan companies as it is more efficient when you have hundreds and even potentially thousands of customers.

Daniel is a loans expert based in London and has been working in the payday loans industry since 2010.