Save More By Paying More?

Many financial institutions are quick to rave about how much money you’ll save and how convenient automatic bi-weekly (every other week) payments are.  In most cases, these benefits are good ones. There is no worry about late payments, you save money by not making a trip to your financial institution or having to mail anything in and, most importantly, the principal of your loan drops more quickly than with a once-a-month payment.

Wow!  With these benefits, why wouldn't everybody take advantage of a bi-weekly payment plan?  The answer is because not all bi-weekly payment programs are created equal.  Depending on your financial institution, these types of payment plans may actually benefit the financial institution more than you, the individual.

The truth is that automatic bi-weekly payments are promoted because they save the financial institution money. Think about it. Delinquency on payments is practically eliminated and it takes less work to process loans electronically than processing payments manually.

That’s not to say you shouldn't check out this option.  If you ask the right questions and find the right institution, bi-weekly payments can offer all the perks they promise. The most appealing part of bi-weekly payments is saving money. If the funds are applied every two weeks something interesting happens.  There is a complicated mathematical formula but, because you’re reducing your loan balance more rapidly, the interest you pay over the long run should be less. For example, you should save about $143 on a 48-month loan of $15,000 at 4.5%. Plus, you make an extra payment each year because of the way the weeks fall, so the loan actually gets paid off four months earlier than with once-monthly payments. What a deal, right?

However, you have to be careful.  Not every financial institution applies the money every other week. Some financial institutions hold the money and apply it once a month, which does not decrease the principal of your loan every two weeks. As a matter of fact, some even charge you for the convenience of bi-weekly payments. Good-bye $143 savings, hello $36 in additional annual fees and payments for the full 48 months.

It’s also important to remember bi-weekly means every two weeks, not twice a month, so make sure you’re ready for the month when three payments are required.  This is how you will ultimately pay off your loan quicker.  You have to make sure you are able to afford it.

Also, be aware of the myths associated with bi-weekly payments.  Some believe making bi-weekly payments improves the borrower’s credit score. This may be true in the long run because automatic withdrawals make it nearly impossible to make late payments, but the same boost to your credit score could be made with any automatic withdrawal for mortgage payments.

At Pioneer Credit Union, like many other credit unions, bi-weekly payments are applied every other week and there is no monthly convenience fee. In this day and age, being a wary consumer is more and more important. Bi-weekly payments can be a great thing. Just make sure they actually benefit YOU when you’re shopping for a loan.