Paying your bills on time can be a balancing act, for sure, but keeping to those due dates is important for a variety of reasons.
If you’re not able to make timely payments on a financial obligation, there can be consequences for you as a borrower, both now and in the future. They include late fees, extra interest charges and your ability to get new financing.
Avoid late fees
Initially, a late payment might result in a fee which is added to your next bill and becomes an extra expense on your account. And who likes an extra expense? The amount charged varies by lender, and you may want to check the terms of your contract to find out how much a late fee is on your account.
Steer clear of added interest
Besides a late fee, you may also face an added interest charge. A late payment, starting at a day late, could increase your interest costs as more interest will have built up by the time the payment is received. Most auto loans are simple interest loans which accrue interest daily.
The actual amount of interest charged will depend not only on how many days late the payment is but also the rate of interest on your loan. The added charge could then lead to a balance to be paid at the end of your contract.
Protect your credit score
It’s also important to know the effect late payments can have on your credit score.
It works like this. Lenders send payment information to credit reporting agencies – the main three are Experian, Equifax and TransUnion – that include the information in credit reports. These credit reports affect your credit score which, in turn, may impact your access to financing and the sort of financing you might get – like how much you can borrow and your interest rate. Late and missed payments are negative entries on your reports that can hurt your credit score and make it harder to borrow money.
When you miss a series of payments and don’t bring the account up to date, the lender may take action such as closing the account, charging off the debt and sending it to collections. No one wants that.
In the case of an auto loan, this may involve the repossession and sale of the vehicle as the lender tries to get back the money it’s owed. If the sale price doesn’t cover all of the debt, the amount that’s still owed may be passed onto a collection agency that will try to collect the money itself.
Missed payments and outcomes like these remain on credit reports for up to seven years. The good news, however, is that the impact of these entries lessens over time.
How to avoid late payments
It’s best to avoid late payments in the first place. To give yourself peace of mind, consider setting up automatic payment reminders or automatic payments with your lender.
When setting up automatic payments, remember that you will need enough money in the connected bank account, or other connected account, for the credit payment to clear. That way, you’ll avoid being overdrawn and charged any extra fees.
