When it comes time to repay your loans, whether student loans, mortgages, or otherwise, you might have the option to set up “autopay.” But what is it? How does autopay work? And what are the benefits and downsides of the setting?
What is Autopay?
Autopay, or an automatic bill payment, is a setting that some banks, lenders, credit unions, and other companies offer their customers to automate paying expenses. If you have a student loan that offers this option, for example, you can choose to have the lender automatically take out the minimum amount due on the same date every month.
Autopay can be used for loans, but it can also be set up for credit cards, car payments, utility bills, health insurance, and other expenses.
What Are the Pros of Autopay for Loan Repayments?
There are quite a few benefits of using this repayment option that you might want to consider.
PRO: You Can Avoid Late Fees
Between rent, car insurance, and loans, you have quite a few bills on your plate each and every month. Autopay helps take the stress of knowing or tracking all the due dates of every single one. If you miss a due date, you usually have to pay a late fee. Thanks to autopay, you won’t miss those deadlines which will result in fewer fees.
Fewer missed payments also means you will increase your credit score!
PRO: You Can Set Your Due Dates
Autopay usually also allows you to set a specific date for your payments. You can choose to pay all your bills and loans on one day every month or spread them out depending on your income schedule. This in turn will help you track your cash flow and may make budgeting a bit easier.
And if something happens where a date no longer works for you? It’s likely you can easily change your withdrawal date right online!
PRO: It’s Environmentally Friendly
This loan repayment option tends to mean you won’t receive bills in the mail reminding you of your current balance and due date. You can see everything on an online portal or receive updates to your email or phone.
PRO: You Could Potentially Save Money
Some companies and lending organizations actually offer incentives for using their autopay functions. You may be able to receive a slightly lower interest rate or receive compensation, for example, if you decide to sign up.
PRO: You Can Set the Amount You Pay Each Month
Autopay can usually be set up for any amount from the minimum payment required and upwards. Just be sure whatever automatic withdrawal amount you decide on will fit into your budget! It’s better to go for a lower number to ensure you don’t overdraft and to give yourself a bit of wiggle room on your cash flow. You can always opt to manually make extra payments at any point.
What are the Cons of Autopay for Loan Repayments?
However, there are downsides to autopay that you will have to think about before actually signing up.
CON: It’s Easier to Overdraw
Autopay really requires minimal input from you once it’s set up. While that can be nice, it can also be a bad thing – you don’t want to set it and forget it. If you’ve forgotten that your loan payment is withdrawn on the 18th, you could easily overdraw and get hit with fees from your bank. So while you can set and forget your loan repayment, you can’t just forget to track your funds.
CON: You Could Miss Mistakes
Mistakes happen when it comes to paying bills, but it’s up to the customer to catch them. If your lender accidentally withdraws too much money from your account, you might not notice it right away with autopay. If you go too long without noticing (or never see the error), that money could be gone forever, especially if it wasn’t properly credited to your loan.
Double payments or extra zeros are not unheard-of mistakes! They’re quite common.
To help avoid this, we recommend reviewing your bank statements every month for errors like this!
CON: Minimum Payments Can Become the Norm
In order to save money and pay less interest in the long run, you need to be trying to make more than the minimum payment each month on your loans. You don’t have to do this all the time, but every little bit helps.
However, with autopay, it’s usually automatically set up to withdraw the minimum payments. If you set it and forget it, you might rarely pay over the minimum amount.
Autopay definitely can be quite useful for individuals looking to automate their bills and loan repayments. However, while it will require minimal input for you after it’s set up, you never want to “forget it.” Keeping track of your payments and budget will help you avoid overdraft fees while also paying above the minimal payment where possible.
To help decide whether or not it’s right for you, reflect on your bill paying habits – will you be able to responsibly keep track of your expenses even if they’re automated? Need advice? Visit with one of our college financial planners.