| 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
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,
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.
I'm 54 years old and on disability. I have about $50,000 to invest.
How can I do this without taking a risk?
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
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
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-- Posted: Jan. 12, 2000