Diving Monthly Payments in half
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Diving Monthly Payments in half
My buddy mentioned that if you divide your monthly car payment in half and make a payment every 2 weeks as opposed to one a month, you will pay less money in interest.. Is there any truth to this? or can anyone explain this to me in a little more detaiL? thanks !
Well, there are 52 weeks or 12 months in a year.
52 divided by 4 is 13, so essentially what you would be doing is making 13 payments a year instead of 12.
However, most car loand do not get recompounded at the end of the year like mortgages do, so you would just be paying the car off faster, not saving any interest because each of those 13 payments will be the same as each of the normal monthly payments.
A better deal is to use home equity to buy your car instead of a conventional car loan.
The interest is less and you can pay as fast or slow as you like.
52 divided by 4 is 13, so essentially what you would be doing is making 13 payments a year instead of 12.
However, most car loand do not get recompounded at the end of the year like mortgages do, so you would just be paying the car off faster, not saving any interest because each of those 13 payments will be the same as each of the normal monthly payments.
A better deal is to use home equity to buy your car instead of a conventional car loan.
The interest is less and you can pay as fast or slow as you like.
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From: Cincinnati
If (not sure here whether this is the case) they handled it like a home mortgage, then 24 payments per year on a loan of $20,000 for five years at 9% would save $397 in interest ($4513 vs $4910). The loan would be paid off 4 months sooner as well.
Here is the link: http://www.hsh.com/cgi-bin/flap.cgi?...&pay1=0&ppno=0
Here is the link: http://www.hsh.com/cgi-bin/flap.cgi?...&pay1=0&ppno=0
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Most car loan interest is compounded daily at somthing like 0.06 percent. If you paid a portion earlier you'd save a slight bit of interest. Your best bet is to overpay significantly during the first year... where the bank makes their interest, and save a lot of money.
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Originally Posted by MazdaManiac
Well, there are 52 weeks or 12 months in a year.
52 divided by 4 is 13, so essentially what you would be doing is making 13 payments a year instead of 12.
However, most car loand do not get recompounded at the end of the year like mortgages do, so you would just be paying the car off faster, not saving any interest because each of those 13 payments will be the same as each of the normal monthly payments.
A better deal is to use home equity to buy your car instead of a conventional car loan.
The interest is less and you can pay as fast or slow as you like.
52 divided by 4 is 13, so essentially what you would be doing is making 13 payments a year instead of 12.
However, most car loand do not get recompounded at the end of the year like mortgages do, so you would just be paying the car off faster, not saving any interest because each of those 13 payments will be the same as each of the normal monthly payments.
A better deal is to use home equity to buy your car instead of a conventional car loan.
The interest is less and you can pay as fast or slow as you like.
Don't you know I'm loco?
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From: Austin, TX
It depends on whether the interest is compounded monthly, daily, or continuously.
Let's say you have a monthly payment of $350.00, at 5% APR.
If interest is only compounded once a month, then it makes no difference. Paying MORE than $350.00 will obviously help save you interest, because anything over $350 will go straight into the principle (ie. no portion of it is eaten up by interest).
If interest is compounded daily or continuously, then 2x a month will save money, although not a whole lot. Let's just look at one payment. If you pay at the end of the month, again using $350 monthly payment at 5%, then we can figure out how much interest you will have accrued:
yearly interest rate = 5% = .05
monthly interest rate thus = 5% / 12 . (12 months in a year)
interest accrued = 350 * (.05/12) = $1.46
If we pay it twice, once in the middle of the month and once at the end, then we have 15 days of accrued interest on $350, and 15 days of interest on $175.
daily interest rate = 5% / 365
interestA = 350 * (.05/365) * 15 = $0.72
interestB = 175 * (.05/365) * 15 = $0.36
net interest = $1.08
So you saved 38 cents.
I hope my math and reasoning are correct. Anyone feel free to correct me if I'm wrong. I learned all this stuff when I was planning to buy my car, and wanted to make sure the dealership didn't pull a fast one on me! But I'm no math or economics major, so I claim no responsibility for the accuracy of this post
Let's say you have a monthly payment of $350.00, at 5% APR.
If interest is only compounded once a month, then it makes no difference. Paying MORE than $350.00 will obviously help save you interest, because anything over $350 will go straight into the principle (ie. no portion of it is eaten up by interest).
If interest is compounded daily or continuously, then 2x a month will save money, although not a whole lot. Let's just look at one payment. If you pay at the end of the month, again using $350 monthly payment at 5%, then we can figure out how much interest you will have accrued:
yearly interest rate = 5% = .05
monthly interest rate thus = 5% / 12 . (12 months in a year)
interest accrued = 350 * (.05/12) = $1.46
If we pay it twice, once in the middle of the month and once at the end, then we have 15 days of accrued interest on $350, and 15 days of interest on $175.
daily interest rate = 5% / 365
interestA = 350 * (.05/365) * 15 = $0.72
interestB = 175 * (.05/365) * 15 = $0.36
net interest = $1.08
So you saved 38 cents.
I hope my math and reasoning are correct. Anyone feel free to correct me if I'm wrong. I learned all this stuff when I was planning to buy my car, and wanted to make sure the dealership didn't pull a fast one on me! But I'm no math or economics major, so I claim no responsibility for the accuracy of this post
Don't you know I'm loco?
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From: Austin, TX
Hold on, I think I already see a flaw in my math. The above was using a TOTAL loan of $350. That's probably not right. Throw the amount of your loan in there instead to see your savings. If your loan amount is x, then make sure to use (x-175) for the interestB calculation.
Thus if you owe $10,000:
1 payment: 10000 * (.05/12) = $41.66 in interest.
2 payments:
intA: 10000 * (.05/365) * 15 = $20.55
intB: 9825 * (.05/365) * 15 = $20.19
net: $40.74
You save 92 cents for every $10,000 owed. score!
Of course, that is per month, so over the course of a year you save $20 or maybe a little over $100 per every $10,000 owed over the course of a 5 year loan. Not bad I suppose, if you schedule automatic payments to take care of the hassle for you.
Thus if you owe $10,000:
1 payment: 10000 * (.05/12) = $41.66 in interest.
2 payments:
intA: 10000 * (.05/365) * 15 = $20.55
intB: 9825 * (.05/365) * 15 = $20.19
net: $40.74
You save 92 cents for every $10,000 owed. score!
Of course, that is per month, so over the course of a year you save $20 or maybe a little over $100 per every $10,000 owed over the course of a 5 year loan. Not bad I suppose, if you schedule automatic payments to take care of the hassle for you.
Last edited by unpocoloco; Jan 2, 2006 at 09:52 AM.
Except most car loans are computed from the date of inception and they won't re-amortize them over their life.
When you receive your payment book, the interest is already computed. If you make odd-sized payments, they will still expect the next payment to be the scheduled amount. By the time you reach the end of the loan, you will not owe the last few payments, but your total interest paid will have been the same.
When you receive your payment book, the interest is already computed. If you make odd-sized payments, they will still expect the next payment to be the scheduled amount. By the time you reach the end of the loan, you will not owe the last few payments, but your total interest paid will have been the same.
Don't you know I'm loco?
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From: Austin, TX
Ok, I see what you are saying. Very interesting.
However, if you pay the loan off early, then you save interest, right? If I owe $10,000 over the coarse of 5 years, for example, and I pay exactly my montly payment, then I will pay a certain amount of interest. If I suddenly win the lottery and pay the loan off entirely in the 2nd month, I don't still pay that same pre-computed interest?
However, if you pay the loan off early, then you save interest, right? If I owe $10,000 over the coarse of 5 years, for example, and I pay exactly my montly payment, then I will pay a certain amount of interest. If I suddenly win the lottery and pay the loan off entirely in the 2nd month, I don't still pay that same pre-computed interest?
YOU ONLY SAVE INTEREST IF IT ISNT COMPOUNDED AT THE BEGINNING OF THE LOAN!
Car loans (the kind where they send you a booklet of payment cupons) have the interest computed right off the bat. You can do nothing to change the total amount of the loan which is the principal plus the interest. It is then divided into a total number of payments which you can play with, but the net amount will remain the same.
Car loans (the kind where they send you a booklet of payment cupons) have the interest computed right off the bat. You can do nothing to change the total amount of the loan which is the principal plus the interest. It is then divided into a total number of payments which you can play with, but the net amount will remain the same.
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Originally Posted by MazdaManiac
YOU ONLY SAVE INTEREST IF IT ISNT COMPOUNDED AT THE BEGINNING OF THE LOAN!
Car loans (the kind where they send you a booklet of payment cupons) have the interest computed right off the bat. You can do nothing to change the total amount of the loan which is the principal plus the interest. It is then divided into a total number of payments which you can play with, but the net amount will remain the same.
Car loans (the kind where they send you a booklet of payment cupons) have the interest computed right off the bat. You can do nothing to change the total amount of the loan which is the principal plus the interest. It is then divided into a total number of payments which you can play with, but the net amount will remain the same.
i know this for a fact, the booklet may not chage payments but I overpaid every one of the cars I owned, and on my last, the payment was 290 and I always paid $400 or more. I'd get statements, or on calling the laon info number it would reduce my payments owed. by the end I could have made $75 payments for the next year and a half if i wanted.. I just chose to cut them check for $700 and pay it off.
Correct. Most states allow the lender to present you with a sheet that indictes your principal, interest and total over the life of the loan. That is what you pay.
This is how car loans are written for the most part - and why I will never use one.
You are far better getting a home equity loan or something similar. Most people, however, can't always do this and so the auto lenders stick it to them.
This is how car loans are written for the most part - and why I will never use one.
You are far better getting a home equity loan or something similar. Most people, however, can't always do this and so the auto lenders stick it to them.
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Most car loans from reputable sources can be paid off early. MAC loans specifically state there is no fee for early payment. You just pay the remaining principle and interest due to date. You can calculate the effect of early principle payments at the following site.
http://www.youngmoney.com/calculator...n_early_payoff
If you do send in extra payments be sure and include a note that says you are making an additional principle payment. If you don't they <may> just treat the money as an early payment for the next month. To be sure, call your lender and verify they applied the payment to principle.
You can also do this with your home loan. If you aren't sure you can afford a 15 year mortgage for it's entire term, just get a 30 year mortgage. You can then calculate how much additional principle to send in each month to pay off the loan early. You'll have the flexability of making the extra payments if you can, but not be locked into the 15 year payments. The interest rate won't be quite as low, but you'll still save lots off interest payments if you stick with it!
You have to read the fine print for any loan you sign! My son made this misstake. He recently wanted to refinance a loan and found there was a $900 early payment fee.
http://www.youngmoney.com/calculator...n_early_payoff
If you do send in extra payments be sure and include a note that says you are making an additional principle payment. If you don't they <may> just treat the money as an early payment for the next month. To be sure, call your lender and verify they applied the payment to principle.
You can also do this with your home loan. If you aren't sure you can afford a 15 year mortgage for it's entire term, just get a 30 year mortgage. You can then calculate how much additional principle to send in each month to pay off the loan early. You'll have the flexability of making the extra payments if you can, but not be locked into the 15 year payments. The interest rate won't be quite as low, but you'll still save lots off interest payments if you stick with it!
You have to read the fine print for any loan you sign! My son made this misstake. He recently wanted to refinance a loan and found there was a $900 early payment fee.
Yeah, early pay penalties are nasty. Some states don't allow them.
That is what killed the purchase of the first home we tried to buy in Phoenix - the current owner didn't realize that it was going to cost him thousands to get out of his second mortgage, so he bailed.
I have seen a lot of finance deals (FNAC and CapitalOne come to mind) that are, technically simple interest loans, even though they are computed using a compunding scale. Pity.
That is what killed the purchase of the first home we tried to buy in Phoenix - the current owner didn't realize that it was going to cost him thousands to get out of his second mortgage, so he bailed.
I have seen a lot of finance deals (FNAC and CapitalOne come to mind) that are, technically simple interest loans, even though they are computed using a compunding scale. Pity.
Don't you know I'm loco?
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From: Austin, TX
YOU ONLY SAVE INTEREST IF IT ISNT COMPOUNDED AT THE BEGINNING OF THE LOAN!
Car loans (the kind where they send you a booklet of payment cupons) have the interest computed right off the bat. You can do nothing to change the total amount of the loan which is the principal plus the interest. It is then divided into a total number of payments which you can play with, but the net amount will remain the same.
Car loans (the kind where they send you a booklet of payment cupons) have the interest computed right off the bat. You can do nothing to change the total amount of the loan which is the principal plus the interest. It is then divided into a total number of payments which you can play with, but the net amount will remain the same.
I just called up Mazda American Credit and asked them this exact question. They call what you are talking about an "Actuarial Loan". This is not what most loans are today (my car loan included). This is a "Simple Interest Loan".
The way it works is that interest is computed on the amount of principal you have remaining. You pay x% interest every day (take total principal amount (outstanding balance), multiply by x, and divide by 365 to find this number). You continue to pay this amount each day until you make a payment. Then the number is recomputed, and repeat.
So paying off early does save quite a bit of money!!
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Originally Posted by MazdaManiac
YOU ONLY SAVE INTEREST IF IT ISNT COMPOUNDED AT THE BEGINNING OF THE LOAN!
Car loans (the kind where they send you a booklet of payment cupons) have the interest computed right off the bat. You can do nothing to change the total amount of the loan which is the principal plus the interest. It is then divided into a total number of payments which you can play with, but the net amount will remain the same.
Car loans (the kind where they send you a booklet of payment cupons) have the interest computed right off the bat. You can do nothing to change the total amount of the loan which is the principal plus the interest. It is then divided into a total number of payments which you can play with, but the net amount will remain the same.
I think this is incorrect. When I financed the wife's Passat I called VW Credit to ask if the loan was calculated on a "per diem" basis, i.e., sending in the monthly payment earlier in the month reduced interest costs, and they said it did.
Therefore, accelerating the first year's payments saves you interest and shortens the loan. Which is what I did, turning a five year loan into a four year one. This is borne out by my statement from VW, which actually gives you principal and interest payments made. Since I'm just about at the end, almost everything I pay now is principal.
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Yes, as MazdaManiac says, if you have a simple interest loan you can save yourself a few pennies by making two payments per month. However, it might not be enough to cover the 2nd stamp per month. Also, I have seen loans which are *not* simple interest. Check your own loan documentation (should have received copies when you bought the car - should not have lost them) and find out for yourself. We don't know the laws in *your* state (particularly since you do not show location), but everyone should be on the lookout for loans which are not simple interest. Just because it's shady and not competitive doesn't mean someone won't sneak it in on an enthusiastic car-buyer.
If you're really concerned about paying less interest finance for a shorter term. When you drop from 4 year to 3 years the payment won't go up a horrible amount, but the amount of interest you pay on the life of the loan will drop substantially.
So, want to feel better about your loan? Quote the term for 1 year longer than you want first. Get a good look at those numbers, then run the loan for the term you really wanted. You'll feel better.
I used to hear these gimmics related to paying off home loans too. All B.S. If you want to save money on your home loan get a 15-year-mortgage. You cut the interest paid to the bank by ~50% and for me to difference was about the cost of cable every month so the wife and I made a pact (mostly in jeft) to not have cable for 15 years.
If you're really concerned about paying less interest finance for a shorter term. When you drop from 4 year to 3 years the payment won't go up a horrible amount, but the amount of interest you pay on the life of the loan will drop substantially.
So, want to feel better about your loan? Quote the term for 1 year longer than you want first. Get a good look at those numbers, then run the loan for the term you really wanted. You'll feel better.
I used to hear these gimmics related to paying off home loans too. All B.S. If you want to save money on your home loan get a 15-year-mortgage. You cut the interest paid to the bank by ~50% and for me to difference was about the cost of cable every month so the wife and I made a pact (mostly in jeft) to not have cable for 15 years.
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