Direct debits and standing orders are both used to make payments from your bank account to another person or business. This means they're a great way to take the hassle out of regular bills and expenses. Both are available on current and basic bank accounts and are free and easy to set up. But, there are differences between the two that will affect when and how you use them.
What is a standing order?
A standing order is an instruction to your bank to pay a set amount to another bank or building society account on a regular basis. You specify how much is paid, when the payment's made and for how long.
Standing orders can run over a set period, for example every month for a year, or you can set them up to pay indefinitely, for example a quarterly donation to a charity.
When should you use a standing order?
Standing orders are useful for regular payments such as your rent, school fees or an allowance for a child at university.
They're great if you want to make a payment to a person rather than to a company. You can also use them to make payments between your own accounts, for example if you save into an Isa or other account regularly when you get paid.
Pros and cons of standing orders
With a standing order, you're in complete control. You can start, stop or change the payment amount or date whenever you want.
They're also easy to set up. Your bank or building society will have a form, or you might be able to set them up online or by phone. All you'll need is the account number and sort code of the person or business you're paying the standing order to.
The potential downside is ensuring the correct amount is paid is your responsibility. So, if interest rates increase and your mortgage payment goes up, you'll need to make sure you amend the standing order to reflect this.
What is a direct debit?
A direct debit gives a company permission to collect a payment from your bank account on an agreed date. Although they can vary the amount they'll take, they'll need to tell you exactly what they're going to take in advance, typically 10 working days before. They can run indefinitely and you also can also cancel a direct debit whenever you like by contacting your bank.
When should you use a direct debit?
Direct debits are great for paying regular bills, especially where the amount you pay might vary. Examples can include bills for your electricity, a variable mortgage payment or your mobile phone contract.
Pros and cons of direct debits
Direct debits are a great way to pay your bills. As well as saving you the time and hassle of paying a bill online or by phone, post or at a post office or bank branch, many companies will give you a discount if you pay your household bills by direct debit. A direct debit can also trigger cashback or rewards on some bank accounts. This means you'll be paid back for settling your bills this way.
They're also easy to set up. The company will provide you with the necessary paperwork and will adjust payments when necessary. Plus, if something goes wrong, you'll be protected by the direct debit guarantee. This means that if there's an error you'll be entitled to a full and immediate refund into your account.
The downside is you'll need to keep an eye on what's coming out of your account and make sure there's enough money to cover the payments.
Sam Barrett is an award-winning freelance personal finance journalist covering everything from the cost of having a baby to pension options at retirement. Her work regularly appears in a variety of consumer and trade publications including Money Observer and Moneywise.