Paying your bills on time can be a balancing act, but making timely payments is important for a variety of reasons.
When you sign a financing contract, you enjoy the benefits of having money to spend or a vehicle to drive when you need it. The creditor, in return, expects you to repay that money according to the terms of the agreement.
If you’re not able to make your payments on their due dates, there can be consequences for you as a borrower, both now and in the future, including late fees, extra interest charges and your ability to get new credit.
Reasons to make timely payments
Avoid late fees
Initially, a late payment may result in a fee which is added to your next bill and becomes an additional expense on your account.
Avoid added interest charges
A late payment, from a day late onward, could increase your interest costs as more interest will have accrued by the time the payment is received. Most auto loans, for example, are simple interest loans which accrue interest daily. The amount of interest charged will depend not only on how many days late the payment is but also the rate of interest within your loan terms. The added interest charge may result in a balance to be paid at the end of your loan.
Protect your credit score
As a consumer of credit, it’s important to understand the effect late payments can have on your credit scores.
Creditors send payment information to credit reporting agencies, the main three being Experian, Equifax and TransUnion, that include the information in credit reports. These credit reports influence your credit scores which affect your access to financing and any terms offered. Late and missed payments are negative entries on your reports that can hurt your credit scores and potentially make it harder to get credit.
If you miss a payment on your account, the creditor can only notify the credit bureaus that it is late 30 days after the due date. The late payment will then appear on your credit reports and remain there for up to seven years. You may realize you have missed the due date and make the payment within the 30-day period, in which case no late payment will appear on your reports.
The effect of late payment on credit scores varies according to the type of credit score and an individual’s credit profile, says Experian, but the following is generally true:
• Late payment will cause a greater drop in your score if you have excellent credit than if you have a poor or fair score.
• Paying late on multiple accounts can be worse than a late payment on a single account.
• Missing multiple, consecutive payments can have a worse effect than missing just one.
• The impact of late payments lessens over time.
When you miss a series of payments and do not bring the account current, the lender may take action such as closing the account, charging off the debt and sending it to collections. In the case of an auto loan, this may involve the repossession and sale of the vehicle as the creditor tries to recover the money it is owed. If the sale price does not cover all of the debt, the difference – known as the deficiency balance – may be passed onto a collection agency that will seek to collect the money itself.
Consecutive missed payments and further outcomes like these also remain on credit reports for up to seven years.
How to avoid late payments
It’s best to avoid late payments in the first place, and you may want to set up automatic payment reminders or auto payments with your lender. Santander Consumer USA customers can easily manage these settings, and more, by logging into MyAccount.
When setting up automatic payments, keep in mind that you will need enough money in the connected bank account for the credit payment to clear and to avoid being overdrawn and incurring any associated fees.
For this reason, it can be helpful to create a monthly budget that enables you to plan for your expenses and other financial priorities. Visit the Santander Consumer Learning Center to watch our “Setting a Monthly Budget” video, and explore more topics to build your financial knowledge.