Debit Order Explained: What It Is & How It Works

A debit order directs a bank to debit a person's account monthly.

A debit order is an authorization by a depositor to a financial institution requesting a recurring debit transaction from their account. Debit orders are used for many types of transactions, including loan payments and bill payments.

Third Party

A financial institution is considered a third party in a debit order. The payment agreement is between a customer and a payee, leaving the financial institution as a third party. The bank, therefore, is not involved in the negotiation of payment; it simply provides the payment using the depositor's money based on the account holder's instructions.

Types

Among the transactions handled using debit orders are home-loan and car-loan payments. In this case, the same amount is debited from a customer's account on the same date each month. Once the order is in effect, it stays in effect until the customer requests it to be cancelled. Many utility payments also can be made with a debit order, but with utility payments, the company requests a different payment amount each month based on the customer's bill. The required amount is automatically paid from the customer's account.

Benefits

Debit orders offer an easy way to manage money and provide assurance the bills automatically will be paid even if the person is on vacation or forgets that payment is due.