What is Autopay and Pros and Cons of Autopay for Loan Repayments

When it's time to pay off your debts, whether it's student loans, mortgages, or otherwise, you may have the option to set up Automatic Pay. But what is it? How does automatic payment work? What are the pros and cons of the design?

What is Automatic Payment?

An automatic payment, or automatic bill payment, is a setup that some banks, lenders, credit unions, and other companies offer to their customers to automate the payment process. If you have a student loan that offers this option, for example, you can choose to have the lender automatically withdraw the minimum amount due on the same date each month.

What are the Benefits of Automatic Payment of Loan Payments?

There are many benefits to using this payment option that you may want to consider.

PRO: You can avoid late fees.

Between rent, car insurance, and loans, you have a few bills on your plate each month. Auto Pay helps take the stress out of everyone who knows or keeps track of all your due dates. If you miss a due date, you will usually have to pay a late fee. Thanks to automatic payment, you will not miss deadlines which results in lower fees.

Fewer missed payments also means you'll improve your credit score!

PRO: You can set your own due dates.

Automatic payments also allow you to set a specific date for your payments. You can choose to pay all your bills and debts on one day each month or distribute them according to your income schedule. This, in turn, will help you keep track of your cash flow and can make budgeting a little easier.

And if something happens, the date isn't right for you anymore? Chances are that you can easily change your return date online!

PRO: It is environmentally friendly.

This loan repayment option means that you will not receive invoices in the mail to remind you of your current balance and due date. You can check everything on the portal or get updates on your email or phone.

PRO: You can save money.

Some companies and lending institutions already offer incentives to use automatic payment functions. You may be able to get a slightly lower interest rate or get compensation, for example, if you decide to sign up.

PRO: You can decide how much you pay each month.

An automatic payment can usually be set up for any amount from the minimum payment required and above. Just make sure that any auto withdrawal you decide on fits within your budget! It's best to use a lower number to make sure you're not overdrafted and give yourself a little wiggle room with your cash flow. You can choose to make additional payments manually at any time.

What are the disadvantages of Autopay to pay off the loan?

However, there are some downsides to paying automatically that you need to consider before actually signing up.

CON: It's easy to over-draw.

Once set up, automatic payments really require minimal input from you. While that can be a good thing, it can also be a bad thing - you don't want to set it and forget it. If you forget that your loan payment was withdrawn on the 18th, you can easily withdraw and collect a fee from your bank. So, while you can set and forget your loan payments, you can't forget to keep track of your finances.

CON: You can forget about mistakes.

If your lender accidentally takes too much money from your account, you may not feel it right away with the repayment itself. If you go too long without looking (or never notice the error), that money could be gone forever, especially if it's not properly deposited into your loan.

Double payments or trailing zeros are not errors! They are very common.

To help avoid this, we recommend checking your bank statements every month for errors like these!

CON: Minimum payments can become routine.

To save money and pay less interest in the long run, you should try to pay more than the minimum repayment of your loans each month. 

However, with automatic payment, it is usually set automatically to withdraw minimum payments. If you set it and forget, you can rarely pay more than the minimum amount.

Auto Pay can definitely be very useful for individuals who want to automate their bill and loan payments. However, even though it requires minimal input from you once you set it up, you'll never want to "forget" about it. Keeping track of your payments and budget will help you avoid overdraft fees while paying more than the minimum payment where possible.

To help decide if it's right for you, consider your billing habits - will you be able to responsibly track your expenses even if they are automated? Need advice? Meet one of our college financial planners.