Want an easy way to save money two weeks at a time?
Pay down your loans on an automatic biweekly or weekly schedule in lieu of a monthly basis.
Frequent, automatic payments shorten the life of the loan by allowing you to hit the principal more often. With biweekly payments, for instance, you end up making one extra payment each year, compared to monthly installments. You'll also reduce the amount of interest that you pay your lender, effectively lowering the interest rate of your loan.
Need another reason? Making weekly or biweekly payments helps from a budgeting standpoint, says Jill Rothenberger, lending consultant supervisor at Dupaco.
"However the member gets paid is how they should pay their bills," Rothenberger says. "Their budget falls better when they do it that way because they have the same amount of money left over in their checking account after each paycheck."
Here's a look at how a biweekly payment plan would leave you money ahead:
Say you take out a $20,000 auto loan for five years at 3.74 percent interest. If you make monthly payments, you will pay off the loan as advertised: in 60 months at an interest rate of 3.74 percent. But if you set up a biweekly payment plan – paying down the loan every two weeks – the effective interest rate becomes 3.38 percent, saving you $195.24 in interest over the life of the loan. As an added bonus, you will pay off the loan in 55 months. Making the payments weekly would save you an additional dollar or two in interest each month.
Biweekly or weekly payments net the most savings on personal loans; motorcycle, RV or boat loans; and home equity loans, Rothenberger says.
But you only see the true benefits if you choose your lender carefully. Read the fine print, because some lenders will charge borrowers a fee to set up an automatic payment plan or charge early payoff penalties. Other lenders might wait until you have a full payment before applying it to the loan.
At Dupaco, members have access to no-cost automatic payment plans and do not face any penalties for paying off their loans early. In fact, some members are entitled to a rate discount, up to 0.45 percent, for setting up an automatic payment plan as part of Dupaco's Cooperative Giveback.
By Emily Kittle