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Ask Dr. Don

Ask Dr. Don

Semi-monthly car payments

Dear Dr. Don,
I am trying to rebuild my credit. I just bought a car, and the interest rate is a little high. It is a simple-interest, 60-month loan. I am looking for a way to cut the interest. I was told that if I make a half-payment every 15 days, instead of a whole payment every 30 days, I could save a lot of money on interest. Is there any truth in this? Do you have any formulas or suggestions so that I can figure out exactly what I would save and how long it will take to pay it off?
Double Vision

Dear Double,
It sounds to me like someone explained this process to you wrong. It's not paying half the car payment twice a month; it is paying half the monthly car payment every two weeks. What's the difference? Well, if you pay half your monthly car payment every two weeks, then you'll make the equivalent of 13 monthly car payments each year. The savings don't come from reduced interest expense as much as they come from that extra payment.

Let's say you borrowed $20,000 at 18 percent for five years. Your car payment would be $507.87 per month. If you set the loan up to pay twice a month, your car payment would be $253.35 twice a month. You're saving a whopping $1.17 per month, less postage.

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But if you paid half the monthly payment every two weeks, you would make $6,602.31 in payments each year. That is in contrast to $6,094.44 if you paid monthly. The difference is an extra car payment, or $507.87.

You don't need to restructure your loan to achieve this benefit. If you can budget the extra $500 each year, just use that money to make an additional principal payment on your loan. Make sure there aren't any prepayment penalties before you start making these additional payments to the bank.

Risk-free investing

Dr. Don,
I'm 54 years old and on disability. I have about $50,000 to invest. How can I do this without taking a risk?
Safen Sound

Dear Safen,
The financial markets reward risk-takers by providing them higher "expected" returns. You can't earn 20 percent risk-free because then risky investments would be expected to return even more. When you ask about risk-free securities, you're looking for U.S. Treasury securities.

I really like the U.S. Treasury's Inflation-Indexed Securities. Investors are looking for their investments to keep pace with inflation and increase their purchasing power. These securities are guaranteed to do that. Their principal increases with the Consumer Price Index and they pay coupon interest in the high 3 percent range. Right now, they are priced to yield about 4 percent plus the rate of change in the CPI. To be guaranteed a 4 percent increase in purchasing power from an investment is a pretty wonderful thing.

You can select between five-, 10-, and 30-year maturities. The only real drawback of these securities is that investors have to pay taxes on both the interest payments and the increase in principal associated with the change in the CPI. Investors, as a rule, don't like to pay taxes on money they haven't received yet.

You can buy these and other U.S. Treasury securities through the Treasury Direct program. The Bureau of Public Debt has some additional information on the inflation-adjusted securities.

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Bankrate.com writers base their answers on our editorial content and advice of financial professionals. We make no claims or representations about the accuracy, timeliness or completeness of such content, advice or the answers provided to you. Our content, advice and answers are intended only to assist you with your financial decisions. However, by its nature such information is broad in scope. Your financial situation is unique, and our content, advice and answers may not be appropriate for your situation. Accordingly, we recommend that you get different opinions and seek the advice of your accountant and other financial advisers before making any final decisions or implementing any financial or investment strategy.

-- Posted: Jan. 12, 2000

 

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