If you have debt, whether it's a mortgage, a car loan, a credit card balance, or a student loan, chances are you have a minimum monthly payment. If you pay half of your minimum monthly payment amount every two weeks instead of sending the entire payment once a month, you may be able to get out of debt more quickly and save on interest charges.
This is easy to set up if you use online banking. Just arrange to have half of your minimum debt payments sent each payday.
This simple change can make a big dent in debt.
Paying every two weeks helps you in two ways:
First, most companies charge interest on your debt daily. That means the credit card company is calculating the interest on the amount you owe them every single day and adding that to your total. If you make a payment every two weeks, you don't have to pay as much interest because your first payment reduces the balance that's used to calculate your daily interest for the second half of the month.
Second, when you pay every two weeks, you will unwittingly be making 13 payments each year instead of 12. This shouldn't scrimp your budget because folks who get paid every week or two weeks get an "extra" third paycheck four months every year.
According to CardRatings.com, here is an example of how much difference a biweekly payment can make:
If you have a credit card with a $5,000 balance at 17% interest and you send in a minimum payment of $150 once a month, you'll pay $4,119 in interest and it will take 14 years to pay off the debt. But if you send in $75 every two weeks, you'll only pay $2,521 in interest and the card will be paid off in 3 years and 18 weeks.
All this without really increasing the amount you are used to paying.
Let's say you have a $10,000 student loan at 7 percent interest. For the standard 10-year term, your monthly payment would be about $116.11 a month. If you sent a payment of $58.06 twice a month, you'd pay $435 less in interest over the life of the loan and you would pay off the loan one year earlier than if you'd sent one payment a month.
Let's say you have a 30-year fixed rate mortgage for $100,000, with an interest rate of 6.5 percent. Your payment would be about $632 each month. If you paid biweekly, you would save $28,587 and would make 69 fewer mortgage payments, in essence shaving almost 6 years off of the life of your loan.
These savings are nothing to sneeze at, but there are some drawbacks.
When just starting out, you have to check your accounts to make sure your payments are credited correctly. You may need to call or write them and make sure they know the payments are to be applied to the principal of your loan. You may also have to ask them to credit the payment the day they receive it, rather than waiting until your due date.
By law, credit card companies must credit payments the day they are received.
Mortgage lenders are not required to post payments the day they are received, and some will even charge you an enrollment fee of up to $400 and a monthly fee of about $9 just for the honor of sending them two checks a month instead of one. If that's the case at your lender, send one check.If you feel strongly about paying off your mortgage early, there are other strategies.
Some banks will allow you to send two half-mortgage payments a month without enrolling in an official program, while others don't allow partial payments. You'll just have to call and ask. For more mortgage payment pros and cons, check out this Bankrate.com article.
Student loans can be paid biweekly, but you need to specifically state that the money should be applied to the principal. Otherwise, the company may just keep postponing your due date, rather than using the money to reduce your current balance.
Despite some of the roadblocks lenders have thrown in front of you, the financial rewards can be substantial. If debt is a black cloud hanging over you, or you aren't good at making sure you have enough in your account to pay big monthly bills, this is an option that may work for you.
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