Do Multiple Micro-Payments Reduce Car Loan Interest?
I was wondering if someone with more mathematical understanding has done a deep dive into paying off a car loan quicker by using multiple smaller payment like weekly or maybe 8 times per month micro payments. In Comparison to the standard " just 1 time" monthly Payment? If your loan allows for 4-8 partial micro payments going toward that monthly required amount it should add up by the end of the month to be 1 whole payment. Example. I buy a used Honda civic 2021 for $21,000 with a 5% auto loan and 60 month term. The monthly payments would be 396.30 $ each month. So almost $ 400. What If I paid 99.40 $ every week and by the 4th week or the 28th of the month I would have paid $ 396.40 which would be the entire monthly amount and an overage of 10 cents. By paying 4 times I have multiple opportunities to reduce the overall daily amortization of the auto loan. So in the long run wouldn’t this allow for the pay off the car sooner than 60 months ? Ironically it’s essentially the same monthly amount I am paying but split up 4 ways to be paid weekly / every 7 days. Also could you take it a step further and do 8 total micro payments, so If the car payment is $400, the. It would be like $50 every couple days, but 8 total times a month. A lot of banks allow you to set up reoccurring electronic payments so you can just set up the rules! Essentially, it’s the same car payment each month, but I think with the micro payments, the car note will get paid off a lot sooner. Just not sure what calculator to use to show this or how to explain this to others. I think I there are still a lot of Financially focused people that still have car payments and this could be a super effective hack If it works and more ppl knew about it.
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Comments
Anonymous...
Your question while "simple" on the service is a bit tricky to actually calculate using a standard loan calculator. What your basically asking is what if instead of paying my loan off in 60 periods (12 months for 5 years) I set the loan at 240 periods or 480 periods.
Making 4x per month payments would save you approximately $23.98 over the life of the loan. Making 8x per month payments would save you approximately $49.38 over the life of the loan.
You can manually set this up in a spreadsheet, but it requires making a few assumptions up front to make the calculations. The critical assumptions are how many days between period, and the payment amount. I assumed for the 4x per month ~7.604 days between each period and for the 8x per month ~3.802 days between each period. I used the payment amounts you suggested ($99.40 and $50). That will give you an approximation to calculate how much money over the life of the loan you could save.
Good luck!
Coach Holdren
With a 5% interest rate, paying the same amount on average a week or two earlier every month is not going to move the needle a lot. I think you're saving less than $1 of interest every month.
(My back-of-the-napkin math is that ON AVERAGE you pay the $400 ish per month about 2 weeks earlier than normal. 5% of $400 is $20, that's the savings if you would pay one YEAR early. Instead you're paying "just" 2 weeks early, meaning you save about 1/26th of $20).
You can use a tool like unbury.me to see how fast you pay off a loan. And hey, an interest rate of 5% is pretty good! With an interest rate of 20% or so... paying sooner matters more!