Have you ever forgotten about a bill and wound up paying a late fee or interest? You may want to consider automating your finances with pre-authorized debit payments.
What is a pre-authorized debit?
Pre-authorized debits (also called direct debits or PADs) are a way to set up recurring, automatic payments in advance. PAD agreements give a biller permission to withdraw funds from a customer’s bank account on a regular basis.
By permitting specific payees to take the money from your bank account every time the bill is due, PADs allow you to “set it and forget it,” so you don’t need to worry about forgetting monthly payments.
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How do pre-authorized debits work?
Pre-authorized debits prevent you from having to wait to receive a bill or payment-due notification before making a payment. Many people use PADs to pay regular bills such as credit cards, mortgage payments, insurance premiums, utilities, and gym memberships.
PADs are an attractive option for people who tend to forget to make payments on time since it prevents late payment fees. They also appeal to people who want to automate their financial lives, so they don’t have to pay each bill manually.
Pre-authorized debit is a very secure form of payment because financial institutions encrypt the information just as they do when you send an e-transfer. Payment information is sent through Canada’s Automated Clearing Settlement System, which has strict safety guidelines.
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How to set up payments with a pre-authorized debit form
Your biller may inform you of a pre-authorized debit option when you set up a new account, or you can inquire if they accept PADs. If you choose to set PADs, you’ll need to fill out a pre-authorized debit form, which will ask for your personal and bank account information.
Alongside the form, the biller must provide an agreement that includes the following information:
- Amount: You can set up PADs for variable or fixed payment amounts. If the amount is variable, such as a utility or credit card bill, the agreement must specify that, and the company is required to give you at least ten days’ notice of the amount that will be withdrawn from your account. For fixed payments, such as insurance premiums, the agreement must clearly state the amount charged each month.
- Timing: The agreement must detail the withdrawal frequency, such as weekly, monthly, annually, or on a specific date (i.e., the 15th of each month).
- How to cancel: The agreement should explain the steps needed to cancel future PADs.
- Contact info: The agreement should contain the biller’s contact information.
- Recourse rights: The agreement must include information about what you can do if there is a dispute about the pre-authorized payment.
Once you sign the agreement, the variable or fixed amount will automatically withdraw from your specified bank account on the designated date. The only thing you have to do is make sure that you always have enough money in your account to cover that debit transaction. Otherwise, you might be charged a non-sufficient funds fee by your bank and a late payment fee by your biller.
Types of pre-authorized debits
According to Payments Canada, the non-profit organization that oversees and regulates the clearing and settlement of payments in Canada, there are four main kinds of pre-authorized debits.
Personal PADs are recurring payments from a person’s bank account for goods or services. Customers often use these to pay monthly bills.
Business PADs are used for business needs, such as payments between distributors, suppliers, or franchisees and franchisors.
Cash management PADs
Cash management PADs move funds between accounts held by a company or closely affiliated organization. Two related businesses may be used to transfer, withdraw, or consolidate funds.
Funds transfer PADs
Funds transfer PADs move funds from one bank account to another account held at a different financial institution. You can use them to make regular deposits into an online savings account or schedule recurring contributions to a registered plan, like a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA).
» See our picks: The best high-interest savings accounts in Canada
When to use pre-authorized debit payments
Pre-authorized payments can be a good idea for anyone who finds it difficult to remember to pay bills and wish to avoid late payment fees. They’re a great way to cut down the time spent paying bills. They’re also an excellent option for people who want to streamline their finances and keep savings goals on track.
When using PADs, it’s crucial to stay on top of your bank account balance to ensure you always have enough to cover your pre-authorized payments.
How to cancel a pre-authorized debit
You have the right to cancel a pre-authorized debit payment at any time. However, cancelling a specific PAD doesn’t cancel your overall agreement with the provider. Plus, you’ll still need to pay for the goods and services you receive, whether by paying the bill manually or writing a cheque.
Your agreement should include instructions about how to cancel the PAD payment, so your first step is to consult it. If it doesn’t outline the procedure, you can cancel a PAD by notifying your biller in writing that you want to cancel. Payments Canada provides a sample cancellation form (page 32 of PDF) that you can follow. Make a copy of the letter you send for your personal records.
Pros and cons of using pre-authorized debits
- Convenient payment method.
- Help you avoid late payments fees.
- Allow you to automate your finances.
- Requires you to keep enough money in your bank account to cover the payment, or you risk being charged fees.
- Small potential for billing errors.
Alternatives to pre-authorized debits
Pre-authorized credit card payments are similar to PADs. This type of payment allows you to pay bills with your credit card by letting the biller automatically charge your credit card on a regular basis to pay for things such as a monthly gym membership or streaming service subscription.
Another option is to pay bills by setting up a recurring automatic payment through your bank account. With this type of payment, your bank transfers money from your account rather than allowing the biller to withdraw. You’ll set up the payment through your online banking and choose who, how much, and when to send it.
Frequently asked questions about pre-authorized debits
A pre-authorized debit rejection is when your biller can’t process the PAD payment, such as if there isn’t enough money in your bank account. If your bank account has insufficient funds, your biller has 30 days to re-try the debit transaction.
In the event of an unauthorized debit transaction, you should first contact your biller to try to resolve the situation. In general, you have 90 days from the date of the erroneous debit to ask for your payment back. However, you only have a right to have your payment returned if the debit went through on the wrong date, was for the wrong amount, or was for an agreement you had cancelled.
You can also try to get the money back directly from your financial institution. If this fails, you can complain about your bank to the Financial Consumer Agency of Canada.
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