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Scott Bilker is the founder of DebtSmart.com and the author of Talk Your Way Out of Credit Card Debt, Credit Card and Debt Management, and How to be more Credit Card and Debt Smart. Send your questions about money, credit, loans, mortgages, or debt, to him at: Scott Bilker, PO Box 563, Barnegat, NJ 08005-0563 or online at: http://www.debtsmart.com/askscott

Scott,

I have a $6,500 signature loan at 13.5 percent APR with my credit union. My minimum payment is $230.28; I always pay $321. There is no pre-payment penalty. Though the payments are due at the end of the month, I try to pay as close to the first of the month as possible, to pay the least amount of interest on the loan. A friend of mine said I should divide my payment over four weeks. Do I save more to pay a lump sum at the beginning of each month; or does it benefit me to pay equal weekly installments on the loan; like $81 per week?

Brian

Many people believe that they can save money by paying more frequently. It's true but very, and I mean VERY, limited.

Let's assume the best case scenario, which is that your $81 weekly payment is applied toward the outstanding balance as soon as it is received. Given this condition the interest charges stop accruing on the payment amount.

Now, the direct answer to your question is, "yes" you will save money paying weekly however, it's not from paying weekly, it's from increasing your monthly payment. Your original loan called for $230.28 per month but you pay $321. If you start paying $81 per week, then you're really paying $351 per month ($81/week x 52 weeks/year x 1 year/12 months = $351/month).

It's clear that $81 per week is exactly the same as $351 per month so the question becomes, "How much does it cost to pay back a $6,500, 13.5 percent loan with $351 monthly payment versus paying $81 weekly?"

With $351 per month it takes exactly 20.88 months or a total of $7,328.88. With $81 per week it takes exactly 90.1 weeks or a total of $7,298.10.

Therefore, paying $81 per week saves a total of $30.78 when compared to paying the exact same amount in monthly payments.

If you're mailing the payments to the bank then we should take postage into account. Paying monthly is 21 payments vs. 90 payments (weekly). That's an extra 69 payments, which is an additional 69, 37-cent stamps for a total of $25.53. That reduces the total savings to $5.25 after postage. In my opinion, saving $5.25 is not worth the effort of successfully orchestrating 69 more payments.

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Reader comments about this article:

"I'm not a math whiz so this helped me as I had been wondering about weekly payments, too! I love this site! It keeps me focused on my priorities, mainly getting out of debt!" 
--Mara Cain

"I like working thru the math. You might have taken into account if the person used electronic bill pay in which case he will not pay for postage and if he stays within his "free" number of payments there would be no additional charge. There is also the likelihood that if he has his checking account with the credit union, he could set up an weekly autopay with them at no charge. This day and age that $30 savings could be easily obtained with little or no effort on his part (well, he would have to make sure he had the money in the bank!)." 
--Cathi Chanslor

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