How to Get Out of Debt Faster With Biweekly Payments

Photo by  Al ghazali  on  Unsplash

Photo by Al ghazali on Unsplash

When we have crushing debt, it can feel like there’s a mountain standing between us and the starting line of our future. It can be incredibly frustrating to know how much time, energy, and money will go into paying off that debt, just so we can finally start tackling other financial goals.

Just for fun, let’s try another way of looking at it. Instead of a mountain, let’s say debt is a hurdle. Instead of waiting to live life until the debt is paid off, what if we took small steps to boost our progress while still working towards other financial goals?

As much as we’d like to eliminate debt from our lives yesterday, there are times when the number is simply too high to justify waiting on everything else until it’s down to zero.

There are even times, such as when you’re paying a very low interest rate, when it doesn’t make as much sense to allocate all your resources to pay-off before working towards other goals. If you’re in such a situation, here’s a way you can get a little boost in your repayment: Biweekly payments. Never heard of them before? Read on to learn how this simple change in your payment structure could potentially save you thousands of dollars.

What Are Biweekly Payments?

The concept of biweekly payments is super simple. Instead of paying your debt bills once per month, you’d pay half of what’s due every other week. In doing so, you effectively make one extra payment per year.

Here’s how it works:

  • For each individual debt you want to pay biweekly, divide the amount you owe per month by two. That number is your new payment amount.

  • Mark down the new payment dates on your calendar, ensuring that they occur every other week — not twice per month but every other week.

  • Next, compare the dates to your due dates and make sure that two biweekly payments will be made each month prior to the due date. If not, and only one biweekly payment makes it in before your due date, you’ll be underpaying your bill.

That’s it. If you happen to get paid biweekly, then setting this up is even easier, because you can arrange to have a payment go out on your payday every other week.

The reason this works is because you’ll end up paying the full amount due 13 times per year instead of 12.

That’s because two months of every year will end up getting three biweekly payments. Those two months will get one extra half payment per year, enabling you to pay another full month’s payment per year almost without noticing.

How Much You Can Save Making Biweekly Payments

You’ve got to love a financial plan that has you paying extra on your debt without forcing you to drastically alter your spending or giving up all your favorite things. But you might be wondering if this small step will have a meaningful impact.

Let’s look at an example to find out.

Testing Out Biweekly Payments

Here’s an example of what biweekly payments can do, using one of the most frustrating (and longest lasting) forms of debt there is: Student loans. For this example, we’ll say you’re carrying a student loan of $30,000. You just graduated, so you have 20 years to pay it off (or 240 months), and you have a 5% interest rate.

Using a biweekly payments calculator from Navy Federal Credit Union, here’s how much you’d save:

Click on the image to calculate the impact on your own loan.

Click on the image to calculate the impact on your own loan.

As you can see here, switching to biweekly payments would shave off 29 months (more than two years) from the total repayment time. Using this calculator, you’ll find that your total interest paid on the debt would go from $17,516.81 to $15,042.24, saving you $2,474.47.

In other words, biweekly payments would mean paying this loan off more than two years early and save nearly $2,500 in interest. How’s that for a meaningful impact?

If you have a mortgage or auto loan, you can use a calculator like the two used above to see what kind of savings you’d get by switching to biweekly payments.  You can also try biweekly payments on a credit card, but calculating the results are a bit trickier because credit card interest compounds daily. Because of that, every little bit extra you pay can have an even larger impact on paying off your credit card debt.

Follow These Steps to Make Sure Biweekly Payments Work Properly

The process of making biweekly payments is simple, but there are a few sticking points to be aware of before you get started. Not doing so could lead to misapplication of your payments and potentially a loss of the benefit you’re working so hard for: Interest saved and debt paid off sooner.

Here are a few things to be aware of before you start your biweekly payments:

  1. Check That Payment Schedule: 

    Before you get started, double-, triple-, quadruple-check your payments schedule to ensure that two biweekly payments occur before every due date.

    Otherwise, you could end up paying under your amount due. And that could mean being penalized with late fees and possibly even having your interest rate increased.

  2. Make Sure Your Lenders Properly Apply Your Payments: 

    One thing that could happen on loans is that the lenders might hold onto your payments instead of applying them right away.

    Student loan servicers, for example, might see that you’re paying extra once enough biweekly payments come in to show that you’re paying more than what’s due. In that case, they could simply extend your due date (saying you don’t owe again until a certain month), instead of applying that extra to your balance.

    Luckily, many student loan servicers have options on their websites to change this. All you have to do is log into your account and look for a box (somewhere in the payments section or tab) that offers the option to apply extra payments right away. Check that box, and you’ll be good to go.

    What a mortgage lender might do when they see your first biweekly payment is hold it until the second one comes in. If they don’t have an option such as the one above listed on their website, you might have to call them and ask them to apply your payments as soon as they receive them.

  3. You Don’t Necessarily Have to Pay a Fee to Make Biweekly Payments: 

    Speaking of mortgage lenders, some of them offer their own biweekly payment services — for a fee. It’s possible yours will only take biweekly payments if you sign up for their service.

    But that doesn’t mean you always have to pay to make biweekly payments. You can do this on your own for your student loan and credit card payments, and possibly even your auto loans. Therefore, just because some lenders charge for this service doesn’t mean you can’t do it for free on other loans or lines of credit.

    Anytime you’re not sure what your options are, you can find out quickly and easily by calling your lender and discussing your wish to make biweekly payments.

  4. Watch Out for Prepayment Penalties: 

    You won’t likely see this on a credit card, but some mortgage and auto lenders (and even private student loan lenders) charge what’s called a “prepayment penalty” for paying off your loan early.

    From their perspective, they were expecting to make a certain amount of money off of your total interest paid by the end of the loan term, and this penalty helps them recoup some of what they’d lose if you pay off the loan before the end of the term.

    You can find out if your lender charges a prepayment penalty by reviewing your account documents or calling them directly. Then use a biweekly payments calculator such as the two above to find out how much you’d save using this method and then comparing that amount to the prepayment penalty.

    If you’d still save money even after paying that penalty, then biweekly payments can still leave you off better than the alternative.

    * Keep this in mind when you’re shopping around for a new loan. There are plenty of lenders that don’t charge prepayment penalties, which is a benefit to you if you know you’d like to pay off any new debt earlier than required.

Every Little Bit Helps

Can we take a second to tell it like it is? Having debt sucks. When the amount of debt we have gets too high, or the interest rates make any progress feel like a herculean effort, it can feel like there will never be life without debt.

But it doesn’t have to be that way. Strategies such as biweekly payments show that even small changes can make a huge difference. 

For you, it could also mean that you don’t have to stop everything else in life until you become debt-free.

There are many more tweaks like this that can put you in control and get you out of debt faster than your bill might imply. Every little bit helps, and every small step can build a momentum you might not feel when simply making your monthly payments.

You can have a life free of debt — all you have to do is use a little strategy.