# Can splitting a monthly payment into two lower interest payed?

For example if I have a monthly payment on a credit card or car loan and its 300 dollars per Months at an interest rate of 2.5% will making 2 payments per month of 150 help me pay less interest? I've heard this before but not sure if it's true.

• This would depend on the country and the terms of loan. Credit Card loans universally follow daily reducing balance. So yet it would help. Auto loans the interest maybe monthly accrued. Thus it may not help. – Dheer Apr 7 '16 at 5:50
• Another option is to use 2 payments to pay more than the amount due, such as paying 75% twice a month, so you are paying 150% (\$450 in this case) per month. You would need to make sure they apply the extra to the principal amount, which would decrease how much you pay overtime. Basically, if you can pay extra to the principal amount, do that to reduce the amount of interest you pay in the long-run. – dakre18 Apr 8 '16 at 15:04

This depends in part on the bank holding your loan and the loan agreement. Some loans will accept partial payments and apply them immediately; some will not accept partial payments at all, and some will accept the payment but hold the funds until the payment is at least your complete payment. You should check your loan agreement to find out how the payment will be processed, as well as how it will be applied.

It also is relevant how interest is calculated and accrued; if your interest is a daily rate, then you may save some money this way, but if it's a monthly rate then you wouldn't necessarily. Either way you wouldn't really save very much money; in your particular case you'd be saving \$0.15 per month (.025/24 = .001 semimonthly interest rate, \$150 paid halfway through the month means you pay .001*150 less interest). Is that \$0.15 worth it? Up to you I guess. If you're paying that for 5 year loan, you'll end up ahead \$9 at the end of it.

Finally, there is a kind of program often offered to new mortgage holders where you pay every two weeks (like your paycheck) and thus 'pay down your mortgage faster by saving on interest', which is true, but it's because you make 26 half payments per year instead of 12 full (or 24 half) payments, not primarily because of particular savings on interest due to timing (and of course the program offerer has to make money somewhere!). Paying an extra 8.33% each year is certainly a good way to pay off your loan faster, but it's not primarily due to the frequency of those payments.

• So that's how those mortgage payment plans work. I've always just thrown that junk mail away. – Phil Frost Apr 7 '16 at 11:15
• Some of them don't even really apply your payment early. They hold the money until the due date ... Earning off of it of course. . – Joe Apr 7 '16 at 12:46

If the \$300 due on a credit card is due at the end of the month and you make 2 payments of \$150 during the month, the first half way through the month and the second at the end of the month, then yes you will save on interest. Note, if this is a Credit Card with an interest free period and you are paying the total amount due before the due date, then it will not save you anything by paying part of it earlier.

Interest on Credit Card is calculated daily, so if you pay \$150 half way through the month then you will pay 2.5% x \$150 / 365 days x 15 days = \$0.15 less in interest than if you paid the full \$300 at the end of the month.

The higher the interest rate and the more you pay early the higher the savings will be.

• Careful, I agree with you on the card carrying a balance, but not a car loan or mortgage. You'd have to check the terms first. I can pay my mortgage 3 weeks early or 2 weeks late with no difference to the balance next month. – JTP - Apologise to Monica Apr 8 '16 at 2:54
• @JoeTaxpayer - most mortgages here work on interest being calculated daily and added at the end of the period (monthly). We also have offset accounts which are savings account linked to the mortgage and any funds you deposit reduce the interest on the loan from the day the funds are deposited. Never had a car loan, but I was mainly referring to the CC. – Victor Apr 8 '16 at 3:37
• I know. Australia mortgage terms are to be envied by the rest of us. I know they exist, and it's why I'd always advise "check the terms". – JTP - Apologise to Monica Apr 8 '16 at 13:04

Tricky question. Many car leasing companies like to quote payments by the week or twice a month to make the car sound cheaper to carry. If the lease or loan is calculated such that interest accrues monthly "not in advance" then any payments made prior to the date on which the interest is calculated will reduce the balance and therefore the interest.

However, many loans and leases are calculated at the beginning for the whole life of the agreement. In that case, splitting each payment in half doesn't do anything to reduce the interest built in to the payments because the interest is calculated "in advance"