Short answer: a lender may not make a loan conditional on you repaying by automatic transfers from your bank account (12 CFR 1005.10(e)(1), Reg E comment 10(e)(1)-1). A lender may instead offer a lower rate if you choose autopay; the federal Direct Loan program, for example, gives an interest rate reduction for auto pay (StudentAid.gov). On the example below a 0.25 point discount saves $42.84 over 36 months. Worth taking if your account can reliably cover each payment; not worth an overdraft.
Can a lender require autopay?
No. No financial institution or other person may condition credit on repayment by preauthorized electronic fund transfers. The rule has exceptions for overdraft credit plans and credit to keep a minimum balance in your account, not for an ordinary personal loan (12 CFR 1005.10(e)(1)). So if autopay is offered, you should be able to get the loan and pay another way, perhaps without the discount. Whether there is a discount, how big it is and when it ends are set by the lender and your contract.
What a discount is worth
Example only, our calculation: a $10,000.00 loan over 36 months, with a made-up base rate of 12.15% APR. Monthly payment: P x r / (1 - (1 + r)-n), r = APR / 12, rounded to the cent.
| Rate | Monthly payment | Total paid | Interest | Saved vs no discount |
|---|---|---|---|---|
| No discount, 12.15% APR | $332.86 | $11,982.96 | $1,982.96 | |
| 0.25 point off, 11.90% APR | $331.67 | $11,940.12 | $1,940.12 | $42.84 |
| 0.50 point off, 11.65% APR | $330.47 | $11,896.92 | $1,896.92 | $86.04 |
A quarter point off cuts the payment by $1.19 a month here. Small, but it costs nothing if the money is reliably there on the due date. Compare offers by APR and total of payments, and check which figure a disclosure shows (how to read a loan disclosure).
If autopay stops
Read what your contract says happens if you turn autopay off or a payment fails. Example only, one way a contract could work: the loan above at 11.90% with autopay; after 12 payments of $331.67 the balance is $7,052.65, autopay ends, the rate goes back to 12.15% and the payment is reset to $332.49 for the last 24 months. Total paid: $11,959.80, which is $19.68 more than keeping autopay to the end ($11,940.12). Your contract may work differently, for example by keeping the payment and changing the last one.
The real risk: your bank account
- If the debit hits when the account is short, your bank may return it or pay it through overdraft, and either can bring fees; the lender may add a returned payment fee. See returned loan payment fees and overdraft fees vs a small loan.
- Pick a due date a few days after your pay arrives; see changing your loan payment due date.
- You can stop automatic debits, but you still owe the payment; how to do it is in how to stop automatic loan payments.
- Check each statement: a discount should show as a lower rate or charge, as your contract describes.
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.