Tag Archives: automated payments

What’s the Better Bargain: Automatic Payments or Paying in Advance?

A while back, I asked you whether you make automatic payments each month to pay down your debt and fund your investment accounts or if you pay in lump sums instead. I was surprised by how many of you told me that, like me, you make quite a few lump sum payments, whether on their own or in tandem with regular monthly payments.

I’d always assumed that making those lump sum payments was the smarter way to go, not just with debt and investments, but with everything. Car insurance premiums? Pay in full! Magazine subscriptions? Sign up for a whole year! I’d seen so many blog posts touting the benefits of early (and complete) payment for services that I started to believe this was always the better option.

That is, until I signed up for a gym membership. Always looking for a discount, I offered to pay in advance for an entire year; this negotiation method had routinely worked for me in the past. So what the membership clerk told me shocked me. “We don’t offer discounts if you pay in advance,” he said, “But we do give you your first month’s dues for free when you sign up automatic payments month to month.”

When Automatic Monthly Payments Are Better

This episode at the gym got me thinking – how many other products and services would cost me less if I signed up for automatic payments instead of paying a lump sum in advance? I decided to do a bit of research to find out:

  • Student loan payments: Sallie Mae, one of the nation’s biggest student loan lenders, urges borrowers to sign up for automatic payments, saying on its website, “you may be eligible for an interest rate reduction on eligible loans” with those monthly drafts. FinAid.org says this is one of the most common discounts for student loans, and typically is worth a decrease of a quarter of a percentage point off your loan’s interest rate.
  • Business loans: Wells Fargo offers new customers a 0.25% rate discount when they sign up for automatic payments directly from an in-house checking account, while Express Equity and Refi customers get a one-time $250 credit when they set up monthly drafts.
  • Credit cards: Last year, Discover Card offered a 2% CashBack bonus on most telecommunications purchases and services (purchases in this category are usually eligible for Discover’s standard 1% CashBack bonus program) set up with automatic bill pay through Discover.
  • Sirius/XM: This satellite radio provider is among the many companies that charges you a fee for an invoice. The $2 fee can be avoided if you sign up for automatic renewal with your credit card; Sirius/XM also offers an additional discount (such as one month free service, or 10% off the subscription price) if you sign up for these automatic payments.
  • Insurance premiums: Although monthly payments – whether made automatically or not – will cost you move in insurance premiums with most providers, signing up for automatic annual or biannual payments can net you a discount. AllState, for example, offers a 10% discount if you sign up for automatic drafts. This is kind of a crossover, where you get a financial boost for paying in advance with those automatic payments.

Do you know of any other companies or industries that offer discounts if you sign up for automatic payments? Which industries reward you for making lump sum payments well in advance?

Do You Make Monthly Payments or Lump Sum Payments?

Many personal finance bloggers encourage readers to set up automatic monthly payments. This results in fewer missed payments, fees, and maybe most important, it ensures that we’re making progress on our debt payments. If we commit to paying extra on our student loans, an automatic payment is great because it happens without us being actively involved, so we are less likely to miss that money.

This year, we’ve been doing the exact opposite. Since January, we’ve made student loan payments of $7,000, $16,000, and $10,000. We’ve also contributed 4 payments of $5,000 to our Roth IRAs and my individual 401(k) accounts. That’s a lot of lump sum payments!

Our monthly bills like rent utilities are automated, but our retirement and debt repayments are not.

Why We Make Lump Sum Payments

I’ve gone through a ton of life events over the past year, which has made automating our bills seem like a bad idea: I am paid a salary but most of my compensation from work comes from commission, so scheduling payments monthly doesn’t make much sense.

I also am running a small business with blogging and other online ventures, so projecting my income is even more difficult. The amount I’m allowed to contribute depends on how much I make, so every time I hit a big milestone in income, I contribute more to our retirement accounts.

Why do we let our checking and saving accounts get so big before making payments? Part of it has been because we’ve been lazy, but a big part of it is because parting with our money is difficult. We worked hard for it and now we have to give it away?

Readers, do you make monthly payments towards your debt and retirement accounts or do you wait and make large payments?