Automatic Payments Work – Here’s Why
Almost every financial institution offers some web bill-pay option or another method for automating your payments. Automatic payments could be an excellent option for those who would like to stay on top of their finances and never miss a bill. Automating your student loan payment allows you to avoid late fees, or any other damage to your credit score, and make extra payments. However, there are different ways that you can automate your payment, and you need to pick one that is perfect for you and your budget.
- Automatic Withdrawals by the Lender
For this method of automating your payment, you give your lender permission to pull funds from a specific account. You provide the lender with your banking information and the schedule of how often you would like to pay; typically, it is monthly.
Some lenders might give you an interest rate discount if you choose to automate your payment. The interest rate discount averages about 0.25%, which might not seem like much, but it adds up over the life of your loan. However, if you choose to stop the automated payment plan, your lender might require you to submit your request in writing, and it could take up to a month for the automatic payment to stop.
Be extremely cautious about who you give your banking information. If scammers get ahold of your banking information, they can misuse that information to their advantage. There have been times when banks were forced to shut down accounts entirely to stop the flow of stolen money.
- Web Bill-Pay From your Bank
Paying your bill from your bank’s online portal or mobile app is a great way to automate your payment while still having more control over the amount and frequency paid. Once you enter the lender information, the amount and frequency, your bank will send out an authorized check on your behalf.
The benefits of web bill-pay are that you do not give your lender your banking information, making it easier to change the amount or frequency, or stop payments altogether. Your bank may provide you with emails or alerts stating a bill will be paid in the next few days, ensuring you have enough funds in the account. Using your bank’s web bill-pay makes it easy to authorize an extra payment, paying your loan back faster.
The drawbacks of this method are that you are missing out on the interest discount that some lenders provide, and because the bank is sending out a check via mail, there could be a delay. Always make sure you set the bill-pay to act a few days before the payment due date, otherwise your payments may be late.
- Credit Card Bill Pay
It will be hard to find a federal student loan lender that will directly accept payments from a credit card. However, you may find this possible with private lenders. There are a couple of benefits to paying with a credit card. For example, if you pay with a rewards card, you may be able to rack up points or miles to use later. Paying with a credit card also gives you an extra billing cycle to pay the student loan amount, if you need that time.
There are many drawbacks to paying student loans with a credit card. Your lender might transfer the credit card processing fee to you, so that will add to the balance of the payment. Typically, credit cards have high interest rates, and if you are using the credit card to pay for your student loan because you can’t afford the payment, it can quickly turn into a mountain of bad debt.
How to Decide
Each person’s financial needs are as unique as they are. If you know that automating your payment will help you keep you current on your student loan repayment goals, then seek out information to automate your payments. Your bank and lenders will have rules and terms that you must review before you sign up. Evaluate your lifestyle and determine which method is right for you. If you want the interest discount, or if you want more control over your finances, or if you would like the rewards from your credit card, determine what you value and initialize that method.