Automated payments: What they are, how they work, and more

Automatic payments can be a convenient way to pay bills on time, every time. With this option, a system can be set up to automatically pay recurring expenses, taking the hassle out of remembering due dates and manually making payments.

Learn the basics of automatic payments, including what they are, how they work, potential benefits and drawbacks, and how to set them up.

What is an automatic payment?

Automatic payments, or autopay, can be a convenient and hassle-free way to manage recurring payments.

This payment method enables a company or organization to withdraw a predetermined amount from a customer’s bank, payment card, or other payment account each due date to cover recurring expenses. This can potentially make paying bills less tedious land time consuming.

Availability to pay bills using automatic payments will depend on the options the billing company offers. Fees and other costs may apply.

Below are a few examples of expenses that can typically be paid using automatic payments:

• Utility bills
• Car loan payments
• Rent and mortgage payments
• Insurance premiums
• Subscription services
• Tuition and student loans
• Charitable donations
• Credit card bills

Types of automated payments

Individuals can set several systems and types of payments as recurring payments for simpler financial management.

• Direct deposit: Get paychecks or government benefits deposited directly into a checking or savings account, which avoids the hassle of cashing a paper check and makes funds available faster.
• Electronic funds transfer (EFT): Move money electronically between bank accounts, whether for paying bills online, splitting payments with a friend, or setting up automatic payments to service providers.
• Automated Clearing House (ACH) payments: This network enables payments like direct deposits and online bill payments to move between accounts, making electronic transactions a common and reliable way to manage finances.
• Contactless payments: Set up a credit or debit card in a digital wallet for automated payments for contactless, automatic transactions.
• Cryptocurrency payments: Some businesses now accept digital currencies like Bitcoin or Ethereum, offering an alternative way to pay for goods or services.

How do automatic payments work?

When setting up automatic payments with a company, the customer usually provides account information and authorizes the company to withdraw a specific amount each month to cover their bill.

This information is then securely stored in the company’s system, and the payment deducts automatically on the due date.

Here's how automated payments commonly function:

• Direct payments: The payer provides their bank information to the biller, who then sets up automatic withdrawals on the due date.
• Bill payment systems: Through a bank’s online payment system, bills automatically are paid by specifying the amount, payee, and date. Ensure sufficient funds to avoid overdraft fees.
• Credit card payments: The payer provides their credit card information to the biller. Some companies may charge a fee for credit card payments, so read over the terms when setting them up. Additionally, only use credit cards for payments that can be paid off to avoid debt.

Pros and cons of automated payments

Are automated bill payments the right option? Here are some advantages and drawbacks to this payment method.

Pros

• No need to manually initiate payments monthly
• Helps prevent late fees and potential negative impacts on credit scores
• Flexible payment scheduling (weekly, bi-weekly, monthly)
• No need for paper checks, invoices, or receipts
• Some billers offer discounts or rewards for managing subscriptions with autopay
• Peace of mind for those who pay bills when traveling abroad

Cons

• Overdraft fees are possible if funds are insufficient
• Easy to forget about payments and lose track of expenses
• Automatic payments may continue during bill disputes or service issues
• Payment information may need updating if the bill amount changes; canceling can be time-consuming
• Some billers may only offer automatic payments through specific methods, like credit cards or bank accounts

How to set up automatic payments

Setting up automatic payments will vary depending on the biller or company. It is usually required to input a payment method when signing up for a new service or account — if so, select automatic payment (if available) when creating an account.

Otherwise, it’s typically possible to change a payment method to automatic for accounts that are already active or in place. Here's how to schedule automated payments, step-by-step:

1. Assess needs: Start by making a list of recurring bills and deciding which ones to automate.
2. Research and select method: Choose a payment method and gather the necessary account information.
3. Use the company’s portal: Log in to the billing company’s portal or access the bank's online system to establish automatic payments. Contact customer service if needed.
4. Monitor accounts and payments: Monitor accounts and billing statements regularly to confirm correct processing and adequate funds.

An automated payment example

An example of an automatic payment is a homeowner setting up a utility bill to be paid automatically each month from a bank account or credit card.

• How it works: The checking account or credit card links to the utility company's online portal to set up an automated payment for the due date each month.
• Benefit to the user: This ensures timely bill payment without manual intervention or remembering the specific due date. Automating this common household expense saves time and reduces the risk of late fees.

Track and manage automated payments with PayPal

For those looking to streamline their financial routines, automating personal finances can simplify bill management and ensure timely payments.

To effectively track and manage automated payments, utilize a platform you can trust. Manage bill payments with PayPal to keep all your financial transactions in one place and start gaining more control over your finances.

When using a credit card for automatic payments, it’s also wise to keep track of credit card statements and review that the payments have been processed correctly. And, as always, one should only add payments to a credit card that they are able to pay off and manage — otherwise there is a risk of accruing debt and dealing with potential fees.