Finance Questions Explained Simply

Simple explanations with no jargon

Direct Debits and Standing Orders

on January 25, 2012

Direct Debits and Standing Orders

So what’s the difference?  In fact, what are they at all?

When you leave home and get your first place there comes with it a raft of responsibility and … BILLS.  Not much fun.  You are likely to have utility bills, such as gas, electricity or maybe oil;  a telephone bill – either landline, mobile or both;  and you will probably have other bills which are for large-ish amounts.  You will probably want to spread the payments over time so it’s not such a big ‘ouch’.  Car insurance, TV license and satellite TV are all good examples.

 

Let’s say you are earning £1200 a month after tax etc (your ‘take home’ pay).   You buy a car with your savings but you don’t have enough for your insurance which is going to cost £1000 for the year.  Obviously you can’t afford to pay it all in one go because then you won’t have enough money to pay your rent, the phone bill, any heating costs and nor will you have enough money to last you the month for food (or, more importantly, beer!).

 

 

You can spread the cost of the £1000 insurance bill by agreeing with the insurance company to pay by direct debit.  All you have to do is complete the form which gets sent to your bank and this authorises them to collect the money from your account in equal amounts on a certain day each month.  By setting up a direct debit it allows the company to collect differing amounts of money from your account, so it might collect 11 payments of £85 each month and one final payment of £65.

 

 

The same goes for your phone bill – the amount you use each month might vary considerably.  One month the cost might be just £20 and the next it might be £35 for example, depending on how much you use it.  By setting up a direct debit, the phone company can collect the money you owe them without having to send you a bill which you stuff in a drawer and forget about.

 

 

So what is a standing order?

A standing order is a method of payment that you are more in control of.  Not all companies will allow you to set up a standing order but it is a method of ensuring that payments you owe are paid on time.  When you set up a standing order you have to instruct your bank to pay a certain company or person a set amount at set regular intervals, such as weekly or monthly, or maybe even annually.  You are totally in control of this payment and it can only be altered by you and not by the person or company you are paying.  Unless you instruct the bank to make only a certain number of payments, they will carry on until you tell them to stop, so it’s a good idea to work out how many payments you need to make if you can and set it up at the time.  It’s very hard to get money back once you have paid it away!

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