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Scott,
I have a $6,500 signature loan @ 13.5% 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/wk?
Brian
Great question!
 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, but you pay
$321 per month. If you start paying $81 per week, then you're really
paying $351 per month ($81/week * 52 weeks/year * 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% 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, over the course of the loan, 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 extra 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.
Hope that helps!
Note: I talk about this in even
more detail in an article titled, Biweekly
Mortgage May be Rip-off and the Household
Math™ problem: Which Mortgage Is Better?
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