Pre-authorized debits (or PADs for short) are a safe way to set up recurring payments electronically. These are agreements that allow vendors to withdraw funds from your chequing account at an interval specified by you.
Here's a guide on how to set up pre-authorized debit payments, the pros and cons of doing so, and some alternatives.
Key Takeaways
- Pre-authorized debits are payment agreements you set up in which a company takes money directly from your bank when billing you.
- Pre-authorized debits are generally known to be safe as they go through the Automated Clearing Settlement System.
- You can set up a pre-authorized debit by providing a void cheque or direct deposit form, then filling out an agreement with the vendor.
- Alternatives to pre-authorized debits include recurring credit card payments and automatic payments by your bank.
When to use pre-authorized debits
Pre-authorized debits (PADs) are best used when you have consistent, predictable recurring bills. They’re a convenient way to automate your payments and avoid late fees without manually logging in every month.
Here are situations where PADs make sense:
- Paying regular bills: Mortgage, rent, car loans, insurance premiums, etc.
- Managing utilities with stable monthly rates: Internet bill, cell phone bill, etc.
- Making set installment payments on government programs: CRA payment plans, etc.
- Service subscriptions (that don't require frequent plan changes): Streaming services, magazines, etc.
PADs are especially helpful when you want your bills paid on time without worrying about missing a due date. They work best when you're confident that the amount will stay the same or when you trust the company to bill you accurately.
Pre-authorized debit vs. credit card payments: what’s better?
Pre-authorized debits and credit card payments each have their own benefits and challenges, and neither is overall better than the other. Choosing between these options depends on how you manage your cash flow and how comfortable you are keeping track of automatic charges.
Here's a look at some of the top features of each:
| Pre-authorized debits | Credit card payments |
|---|---|
| No interest charges (if you have proper funds) | Interest charges if you miss a payment |
| Doesn't affect your credit utilization ratio | Risk of increased debt if not paid off monthly |
| Immediate withdrawal from your bank account (no grace period) | Delays the impact on your bank account (until your card's due date) |
| Limited fraud protection | Strong fraud protection policies |
| Limited opportunity for rewards points or cashback | Builds rewards points or cashback |
| Can cause overdrafts if balance is low | Overlimit fees apply |
Are pre-authorized debits safe?
First, the most important question – yes, PADs are quite safe as banks and other financial institutions follow the latest encryption standards and go through the Automated Clearing Settlement System. This is the same system used for direct deposits and Interac e-Transfers.
How to set up pre-authorized debit payments
Setting up pre-authorized debits can be done in two easy steps.
1. Provide your bank information
For all banks, you'll be required to provide a void cheque or a direct deposit form. Simply get a cheque and write VOID across it, or download the direct deposit form and fill it out.
2. Fill out a pre-authorized debit agreement
Next, you'll need to fill out a pre-authorized debit agreement, provided by the biller, to give your permission for withdrawals.
It has to be sent at least three days before the first withdrawal from your account and include the details of the agreement.
Include the dollar amount
Remember that your PAD agreement should include the amount of the pre-authorized debit. This can be fixed (the same every month) or variable (different amount every month).
If you choose to go with the variable amount, the biller has to give you a written notice of the amount at least 10 days before they withdraw the funds (unless you agree to waive or shorten that period).
Be sure to check this carefully. Not only will this ensure you’re paying the right amount, but it will also be evidence if you’re charged the wrong amount, allowing you to get your money back.
How to cancel a pre-authorized payment
Your PAD agreement will contain details about how to cancel your contract. But your first step should always be to contact your bank or PAD provider. They'll require a written notice of cancellation, usually within 30 days of the due date for the bill in question.
If the written notice isn't received within this 30-day timeframe, the cancellation may not take effect in time, and you'll still be charged.
Be sure to check your account on or near the bill's due date to ensure the cancellation took effect properly.
Remember, though, that cancelling a PAD doesn't nullify your obligation to pay for any goods or services you receive. You'll need to make other arrangements to pay any amounts owing to a particular biller.
You could also request a stop payment from your bank if you're concerned that the PAD cancellation won't take effect in time. This isn't guaranteed to work, but it's worth considering in emergencies.
Pros and cons of pre-authorized debits
Let's go over the pros and cons of using PADs:
| Pros | Cons |
|---|---|
|
|
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$25 GeniusCash + Delicious meal choices with fresh ingredients + Front-door delivery.Alternatives to pre-authorized payments
The most obvious alternative to pre-authorized payments is recurring billing on a credit card. You can use this on many subscription services, like streaming. These can be advantageous because using a credit card can result in rewards, whereas debit cards cannot.
You can also set up automatic payments from your bank. This differs from pre-authorized debits as the bank will send money to the biller instead of the biller pulling money from your account.
What to do if you're charged the wrong amount
Mistakes happen, but you’re not stuck if a company pulls the wrong amount from your account via PAD. You have options to fix it, and you’re protected under Canadian banking rules.
Acting quickly helps avoid unnecessary fees or balance problems. Most banks make it fairly simple to dispute a wrong debit when you move fast.
Here’s what to do:
- Contact the billing company immediately: Ask for an explanation and a refund if it’s their error.
- Reach out to your bank: You can request a reversal for unauthorized or incorrect pre-authorized debits, usually within 90 days.
- Fill out a reimbursement claim form: Your bank will have a specific form you’ll need to complete to start the process.
- Monitor your account: Check to make sure the refund goes through and no additional charges occur.
- Consider cancelling the PAD: If the company continues billing incorrectly, cancel your authorization and find a more reliable payment method.
FAQ
What can I do if there was a pre-authorized debit on my account that I didn't approve?
You should immediately contact your biller and ask for your money back. If the debit was made on the wrong date, made out to the wrong amount, or if you cancelled the contract, a refund shouldn't be a problem.
If I have the option, should I pay with a credit card instead?
Some people may be better off using a credit card for automatic payments, especially if their card earns them valuable rewards points. But PADs can still be a valuable and convenient option, even if reward points aren't available.
If I cancel a pre-authorized payment, does that cancel the whole contract?
No, it will only stop that one individual PAD. Cancelling a pre-authorized agreement entirely requires contacting your bank/PAD provider and giving written notice of your intent to cancel within 30 days of a bill's due date.
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