There’s an understandable hesitancy to allowing a lender to withdraw monthly loan payments automatically from a bank account. Sometimes the concern is uncertainty about the payment amount. That issue can be alleviated by using a loan payment calculator when applying for the loan and then carefully reading the loan agreement.
Payment terms for personal loans are clearly stated in the loan agreement. This differs from a credit card account, where payments usually vary each month. With an installment loan the monthly payments are fixed, making it easier to budget for them. Setting up automatic loan payments ensures those payments are sent on time, but that’s not the only benefit. There are other advantages too.
1.Setting up automatic loan payments is simple
Many lenders can set borrowers up on automatic payments soon after approving a loan application. They’ll ask the new borrower for bank routing and account numbers, then schedule the withdrawal of automatic payments for the entire term of the loan.
2.Automatic loan payments are convenient
It’s convenient when you don’t need to remember when your next loan payment is due. Life is busy enough without adding extra stress to it. Automatic payments are a set-it and forget-it strategy for paying off your loan. Remember though, it’s your responsibility to make sure there’s always money in your bank account to cover the payment. Setting up a direct deposit of your pay is the key to ensuring your bank account balance remains adequate to cover those automatic loan payments.
3.Consistent on-time payments may improve your credit score
Making consistent on-time personal loan payments is one of the most effective ways to improve your credit score. The FICO® credit scoring system counts your payment history as 35% of your overall credit score. Making regular payments signals financial responsibility and helps demonstrate you are reliable when it comes to repaying debt.
Payments will also reflect favorably in credit reports, which lenders use as a way of vetting potential borrowers. The more often you make payments that count toward your personal loan’s principal balance, the faster your credit score may likely increase.
In addition, missing payments can lead to steep late fees, additional charges and higher interest rates, so staying current with your personal loan repayment schedule is essential for safeguarding not only a good credit score but also overall financial health.
4.No missed payments means no past-due calls
Setting up automatic payments with your bank or the lender goes a long way toward removing the risk of missing a payment due to forgetfulness or procrastination. Paying on time means you shouldn’t get past-due reminders or calls. With automatic payments, your personal loans get paid by your bank on the agreed-upon date every month.
5.Automatic loan payments are safe and secure
Some consumers don’t like setting up automatic payments because of concerns about security. But think about it, how secure is it to pull out your credit card where all can see or send a check in the mail with your routing and accounting number printed across the front? Lenders use high-level payment encryption that protects your data far better than either of those methods.
Financial institutions are required to provide an added layer of protection by using the highest security standards, including data encryption, two-factor authentication methods, and one-time passwords with personal access tokens. This helps ensure your personal data remains private and reduces the risk of fraud when payments are processed online.
The Bottom Line
This is not a recommendation by any stretch, but the benefits seem to outweigh the drawbacks of using automatic payments for your loan.
Setting up automatic payments is a safe and essential tool for anyone needing to manage personal loans. It’s simple to do, convenient, and allows you to keep track of your financial situation without worrying about meeting a due date. Not only do automatic loan payments provide you with ease and a sense of security, consistently making on-time payments may also improve your credit score. Furthermore, no more fear about receiving past-due reminders and calls in cases of missed payments, making it an ideal tool for personal finance management.
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