With rising vehicle prices, many Canadian drivers are opting for longer auto loans to keep monthly payments manageable. However, while a 7-year (84-month) auto loan might seem appealing due to lower payments, it also means paying significantly more in interest over time. For example, a $40,000 vehicle financed over 84 months at a 9% interest rate results in over $12,000 in interest payments alone. That’s a steep price to pay just for spreading out the cost.
If you’re looking for a way to reduce the total interest paid and pay off your car faster, switching to bi-weekly payments might be the solution. By making payments every two weeks instead of once a month, you can save thousands of dollars in interest and own your car sooner.
What Are Bi-Weekly Payments?
Bi-weekly payments involve splitting your monthly car payment in half and paying that amount every two weeks. Instead of making 12 payments per year, you’ll make 26 half-payments, which is equivalent to 13 full payments annually. This extra payment helps reduce your principal balance faster, thereby decreasing the interest that accrues over time.
For example, if your monthly car payment is $500, your bi-weekly payment would be $250. Over the course of the year, you’ll make 26 bi-weekly payments, which equals $6,500—effectively one extra full payment.
The Benefits of Bi-Weekly Payments
1. Pay Off Your Loan Faster
One of the biggest advantages of switching to bi-weekly payments is that you’ll pay off your loan faster. By making that extra payment each year, you can shave months off your loan term. For a standard 84-month auto loan, bi-weekly payments can reduce the payoff period to about 79 months—nearly five months earlier than with monthly payments.
2. Save on Interest
Bi-weekly payments also help you save on interest. By reducing your principal balance more frequently, you give the interest less time to accumulate. This can lead to significant savings over the life of the loan. For instance, on a $20,000 loan with a $300 monthly payment, switching to $150 bi-weekly payments could save you hundreds of dollars in interest by the time the loan is paid off.
3. Own Your Vehicle Sooner
With bi-weekly payments, you’ll build equity in your vehicle faster, meaning you’ll own it outright sooner. This accelerated ownership can be financially beneficial, allowing you to trade in or sell the car with positive equity sooner than if you were making monthly payments. It also reduces the risk of being “upside down” on your loan, where you owe more than the car is worth.
How Do Bi-Weekly Payments Work?
The process of setting up bi-weekly payments is straightforward. Simply divide your monthly payment in half and schedule that amount to be paid every two weeks. For example, if your monthly payment is $500, you would set up bi-weekly payments of $250.
Most banks and auto lenders offer the option to automate these bi-weekly payments, ensuring that they are made on time without requiring manual intervention. This automation helps keep your loan on track, reducing the risk of missed payments.
Real-World Example: The Impact of Bi-Weekly Payments
Let’s consider a real-world scenario. Imagine you finance a $40,000 vehicle with an 84-month loan at a 9% interest rate. With monthly payments, you’d be paying around $623 per month, totaling $52,332 over the loan term, with $12,332 of that being interest.
Switching to bi-weekly payments, you would pay $311.50 every two weeks. This simple change would reduce your loan term to 79 months, and the total amount paid would drop to $49,868, saving you $1,204 in interest.
Tips for Managing Bi-Weekly Payments
Switching to bi-weekly payments requires some organization and discipline. Here are a few tips to help you stay on track:
- Automate Your Payments: Set up automatic transfers through your bank or lender to ensure payments are made on time.
- Track Your Progress: Use a loan calculator or spreadsheet to monitor how much principal you’re paying down and how much interest you’re saving.
- Budget Carefully: With more frequent payments, you’ll need to manage your cash flow effectively. Make sure you have the funds available for each payment.
- Set Payment Reminders: If you’re not automating your payments, use reminders to ensure you never miss a due date.
Conclusion
Switching to bi-weekly payments on an 84-month auto loan is a smart financial move that can help you save money and pay off your car faster. By making 26 payments a year instead of 12, you reduce the amount of interest you pay and build equity in your vehicle more quickly. For most borrowers, this simple change can lead to significant savings and help you own your car outright sooner.
If you’re currently paying monthly, consider making the switch to bi-weekly payments. The savings in interest and the accelerated loan payoff make it well worth the effort.
