Does a bi-weekly payment on a car loan work on the same principles as in a mortgage?

[rootaxs]

If so, how exactly would that work? Say my minimum payment is $300/mo. This would mean i'll be paying $150 every 2 weeks instead right? And hopefully, this would save me a bit on the interest over a course of 5 years.

Is this even worthwhile on a car loan with a lower principle balance?

Thanks.

 

[RossMAN]

Yes, assuming both are simple interest loans they both work on the same principle. Interest accrues on a daily basis so every 2 weeks when you make a payment you'll satisfy the interest which has accrued since your last payment, the rest will go to satisfy any fees (late fees, etc.) if any and the rest will go towards reducing your principal balance.

It's a pain in the ass if you ask me to make a payment every 2 weeks but it should reduce your overall interest and maybe shorten the term of your loan by a month or two.

 

[StageLeft]

I believe most of the effect is because there is normally 31 days in a month so if you pay every two weeks you're paying $300 in 28 days instead of 31, but to get the same effect just raise your monthly payment by 31/28 * 300 = $332. The only difference with the biweekly is the small interest saved by having the extra two weeks.

 

[rootaxs]

Yep, i have a simple interest loan on my car. Paying every 2 weeks doesn't bother me really, i have BoA send out checks automatically to the credit union where i got the loan from.

So, how exactly would this work then? I send a first payment for $150, then another one in 15 days for $150? Would i normally have to tell them to "apply to principal" like one would for a mortage payment?

 

[rootaxs]

So would it make more sense (as i'm assuming it does) to do a biweekly payment + change each month?

I used to do it so that i pay an additional $50 each month on top of my minimum payment. But seeing how it works on mortages there seems to be a bigger interest savings if a biweekly is done.

Now adding two and two together... should it be something i can seriously consider doing?

Thanks for the replies!

 

[RossMAN]

I would just make a payment once a month (every 30 days) and add another $50-$100 to it.

The interest you'll pay on a car loan is significantly less than a home mortgage so paying every two weeks may save you $200-$300 down the road, not as much as saving $5,000 on a home mortgage which is significant.

Can you call wherever you have your car loan through and ask them what your per diem is?

 

[vi edit]

I think you're better off doing like what Ross and just cutting a second check at the end of the month and tossing it in with your normal payment. Be sure to check on there that the extra money is going twords principal, otherwise the sneaky bank will just apply it to the interest. You'll probably come out ahead this way, and don't have to worry about sending in a check every other week and the bank missing it and looking at it as a "late payment".

 

[wsking]

300 x 12mo = 3600
150 x 26week = 3900

therefore you are paying bit more and save little on the interest

 

[rootaxs]

Thanks for the replies yet once again.

But forgive my ignorance... what does "per diem" mean?

Anyway, judging from the numbers and factors. It seems biweekly payments don't really save me much yet adds to the hassle. Hmmm.

 

[vi edit]

I think per diem is : per day.

Basically the interest that you accumulate on a daily basis. It's basically your interest rate divided by 356 & 1/4.

You can then take that number and multiply it by your payoff amount to get your interest amount.


So, if your interest rate is 10% just divide .10 by 365.25 = .00028% interest accumulated per day. If you have a $10,000 payoff, your interest for that day would be $2.80.

 

[RossMAN]

<< Thanks for the replies yet once again.

But forgive my ignorance... what does "per diem" mean?

Anyway, judging from the numbers and factors. It seems biweekly payments don't really save me much yet adds to the hassle. Hmmm. >>



Per diem is the amount of interest you're paying every day, for instance if your per diem is $2.05 per day and you make a payment once a month your monthly interest charges are $61.50 ($2.05 per day x 30 days), the per diem changes after every payment you make, gradually it goes down a few cents, then more and more until you're paying 1 cent a day then your loan is paid off one day.

Also when you call your bank, ask them of your last 2-3 payments of $400 how much was applied to interest and how much was applied to principal?

So here's a run down of the questions you should ask them:
1) What is my per diem (interest per day)?
2) Of my last 2-3 payments how much was applied to interest and how much to principal?
3) What is my current balance (not payoff), how many payments are left, when does my loan mature?

After asking them these questions, you can plug these figures into a loan calculator, here's the really spiffy part. They have loan calculators which let you run "what if scenarios", for instance, "what if I paid an extra $50 per month or $75 per month, how much interest would that save me and how many months would it reduce the term of my loan by".

Financial calculators are fun!