Changing My Payment Date Saved Me 25% Per Month

by Eric on November 29, 2008

I have talked about my car loan a few times on this blog, and I just wanted to update you on something interesting I just discovered.

I am a big advocate of paying your loans twice per month. If your loan payment is $250, for example, you should pay $125 each payday rather than the $250 once per month. Why, you ask? The dollars you pay are, indeed the same.

I started doing this a few months ago, and I can now pull an average of what I pay in interest.

Paying once per month: $40 per month in interest (average).

Paying twice per month: $30 per month in interest!

That is 25% interest savings per month. That $10 per month is considered an extra principle payment that helps pay my loan faster and saves me money on my monthly and total interest paid to the bank.

It is a little trick with big results.

Eric Mo
Better check your math, buddy. What you said just didn’t sit right with me, so I pulled up a spreadsheet and ran some numbers.
For my loan of $10,326 at 6.50% over 60 months, the payment is $202.04 per month. On average, I’m paying $29.94/mo in interest.
If I instead pay twice a month, the payment becomes $100.90, averaging $14.85 per payment in interest. Two of those a month is $201.80 with $29.71 in interest for a savings of just 23 cents, or less than one percent–not the 25% that you claim.
Here’s a link to my shared Google spreadsheet.
Also, the title of your blog is misleading–you say “Saved Me 25% Per Month” when you really meant “Saved Me 25% Per Month in Interest” (even with the faulty math). There’s a big difference.
Sorry if I sound rude. I’d be happy to take a look at your numbers, if you’d like. My contact info is on emortenson.googlepages.com
-Eric Mortenson
Independent Business Consultant
Eric
I appreciate the comment and check of my math. I made a Google Spreadsheet too.
I used very rough math before, but wanted to be sure when I responded to you. You are obviously pretty sharp in the finance department. I found a 32% interest savings in my detailed calculation.
As far as the title, I would not consider simply lowering your payment to be saving. That is fixed. The only way to save on a loan is to cut interest, hence the title.
Eric
Also, thanks for your comment. I like to be kept on my toes.
Eric Mo
After looking at your spreadsheet…
The reason your interest has gone down is because your principal has gone down.
Let’s say your loan was originally for $10,000 at 5%. The interest on your first month will be 10,000*.05/12 (because there’s 12 months in a year), or $41.67. The rest of your payment goes toward principal and reduces the amount you owe on the loan. After a year and a half, if your loan principal is only $7415, the interest is $30.90, or 7415*.05/12. So the interest you’re paying after 18 months is about 25% less than what you were paying originally, because you owe 25% less than you did originally. Example calcs are on Sheet3.
-Eric Mortenson
emortenson.googlepages.com
Eric
You are right on that part. I did not take into account the lowered principal (mostly from accelerated payments).
It looks like it is closer to a 6.36% per month savings on interest when checking two consecutive periods.
Thanks for keeping me in check. Keep commenting and come back often.