Pay Off Loan Sooner?

Question

I bought an out of state property and have about $50,000 left to pay off for the loan. Anyone know if paying 1 huge principle payment at the end of each year would pay it off faster verses bi weekly payments?

Noah Wright · Answer

Hi Samuel,When considering how to pay off a loan faster, both methods you've mentioned—making a large principal payment at the end of each year versus bi-weekly payments—can be effective, but they operate differently.

• Large Principal Payments: Making a large payment once a year can significantly reduce your principal, leading to lower interest costs over the life of the loan. However, the impact of this method depends on how interest is calculated on your loan (e.g., daily vs. monthly compounding).
• Bi-Weekly Payments: Paying bi-weekly effectively means you're making one extra payment each year (26 half-payments vs. 12 full payments). This can help reduce the principal more frequently, which means you'll pay less interest over time compared to just making monthly payment

• Interest Savings: Bi-weekly payments often result in more interest savings over time compared to a single large annual payment, as the principal is reduced more frequently.
• Flexibility: If you have a good year financially, making a large principal payment can give you flexibility, but it may not be as effective in reducing interest if the loan has high monthly compounding.

If you're looking to pay off the loan sooner and save on interest, bi-weekly payments are generally more effective. However, if you prefer to make a single payment due to cash flow considerations, that can also work well, especially if you can make it substantial. Simple answer: the faster you pay off the debt, the less interest you will pay.