Bi-weekly car loan payments can be a sound financial plan for some borrowers. With new car loans increasingly on the rise, this strategy has become increasingly relevant.
The average amount financed for new cars was $42,113 in Q4 2024, up $1,400 from Q3, according to Edmunds. For larger loan amounts, the interest savings that bi-weekly payments could provide could also be greater.
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Instead of a crushing payment once a month, you can take care of things and make two payments every two weeks. If this is done each year, it ends up in 26 half payments, which is equivalent to 13 complete monthly payments.
That extra payment can shave a few years off your loan term and save you some money down the line in interest. But this isn’t a good idea for everyone, so here’s what the experts say.
Financial Benefits and Drawbacks
Paying off your car loan bi-weekly can help you reduce the time it takes to pay off your car loan, as well as reduce overall interest over the length of your loan.
You make an extra payment each year so you pay off your principal faster, paying less interest. If you have a $20,000 five-year loan at 7.5% interest, bi-weekly payments could save hundreds of dollars in interest and months on the loan.
“Some benefits include paying off a loan faster and fewer payments in total,” said Tom Holgate, executive vice president of auto finance and insurance at Way.com. “It has its drawbacks, though, one being that it might be a bit harder to budget the timing of making two payments in one month.”
With bi-weekly payments, you’re essentially splitting your bi-monthly check twice; it requires you to budget more often than once a month. For people whose income does not follow a set schedule or who have a lack of cash on hand, this can be a problem. In addition, some lenders may charge a fee to set up biweekly payments or delay the application of payments in some ways, making it less beneficial.
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Ideal Scenarios for Choosing Bi-Weekly Payments
When your car loan operates on a simple interest basis, bi-weekly payments are most effective.
In these loans, interest is accrued daily on the outstanding principal balance. By paying more often, you are preventing interest from accruing between payments. Moreover, it works great for borrowers who are paid bi-weekly, as it’s indeed aligned with their paycheck and is associated with good financial habits to adopt.
“A bi-weekly payment loan can be good as long as it’s a real simple interest loan and there aren’t other timing problems,” Holgate explained. “Additionally, some people may also need the discipline of making payments more often than once a month.”
Nonetheless, not all loans nor lenders use bi-weekly payment. Some states allow pre-computed simple interest loans with fixed interest rates, so paying more often doesn’t lower them.
If it’s something you can afford, you don’t need to pay this way to save money or time.
Impact on Total Interest Paid and Loan Duration
The impact of bi-weekly payments on total interest paid and loan duration depends on the type of loan and its terms. For most simple interest loans, bi-weekly payments can significantly reduce both metrics.
If you have a $28,000 loan at a 7.5% interest rate over five years, switching to bi-weekly payments can lead to significant savings. You could save over $500 in interest and pay off your loan about five months earlier.
However, as Holgate noted, “Depending on the interest accrual method, there can be significant interest savings or none at all. Some states allow a ‘pre-computed simple interest loan,’ which means that there is no financial advantage to paying monthly — i.e. the interest for a given month in the term of a loan has a set amount of interest.”
Considerations for Different Financial Situations
Bi-weekly car loan payments are not universally beneficial and depend heavily on individual financial circumstances. This method saves money and speeds up debt repayment for borrowers with stable incomes who can afford smaller but more frequent payments.
On the other hand, those with variable income or tight budgets might find it harder to keep up with bi-weekly schedules. In such cases, sticking to monthly payments might be more practical. Additionally, subprime borrowers who use “buy here, pay here” dealerships should also review their loan terms before choosing bi-weekly payments, as they may not save much.
Holgate pointed out, “Bi-weekly payment loans are not very common. Most likely they will be available at buy here pay here car dealers, which are structured for subprime borrowers.”
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This article originally appeared on GOBankingRates.com: Should You Do Bi-Weekly Car Loan Payments? Here’s What Experts Say
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