The bi-weekly payment idea for loans and mortgages has for a long time been sold ion the fact that it can save you money. While this is true to an extent it usually depends on the terms of the loan itself and on how the loan company has set out its interest rates. It certainly isn't some miracle cure all for money troubles that the companies would have you believe. In fact if you do save anything it tends to just be because of the fact that you are paying back a little more then you would have been if you were paying monthly.

Usually with loans you either have a fixed rate or a variable interest rate on the balance that you owe. Fixed rate means that no matter what happens you will only pay a set amount of interest agreed upon at the time that the loan is taken out. Variable rate loans will vary in the amount of interest that you are charged according to the state of the economy and as a result how high the federal bank sets standard interest rates.

Which one is cheaper depends largely on how well the economy is doing. If the banks want to encourage spending them they lower the interest rates, and if they want to encourage saving them they raise them. So if you have a variable rated loan and suddenly the rate of interest you will be paying is raised by a lot, then paying bi-weekly might not make enough of a difference to actually save you any money.

Basically with a monthly payment system you are paying for example $2000 every month, which adds up to $24000 per year. When you pay bi-weekly however you end up paying a little more because of the fact that there aren't exactly 4 weeks in each month. So instead of paying $2000 every month you end up paying $1000 every 2 weeks. This then becomes 26 payments rather than 24 because of the extra few weeks in every year.

This in turn means that you will be paying a little less interest over time because each time the interest is calculated there will be a little less on the outstanding balance. However should you choose the bi-weekly payment option then some loan companies will raise your interest rate very slightly so that you cant save any money by doing so.

An easier way to save money on any loan is to get a flexible payment program with a low monthly or bi-weekly payment amount. That way you can pay as much as you want to, and by paying extra when you have it you will reduce the time it will take to pay off as well as decreasing the interest that you will be charged.

The most important thing to do when getting a loan is to read and examine the terms very thoroughly and then see what payment option will likely save you the largest amount of money. Some loans are better suited to standard monthly payments and wont benefit from bi-weekly payments. Others might work out a lot cheaper with bi-weekly payments and could end up saving you thousands of dollars in the long run. And again some will be better with fixed rates and some with variable.

Learn more about this author, Scott Heritage.
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