Short answer: there are 26 two-week periods in a year, so half a payment every two weeks adds up to 13 full payments instead of 12. That extra payment is what saves money: on the example below it cuts $217.46 of interest and pays the loan off a few months early. It only works if the lender puts each half payment toward the loan when it arrives, and you get almost the same result by adding one twelfth to each monthly payment.
The math on one loan
Example only, our calculation: a $10,000.00 simple interest loan at 11.90% APR over 36 months, monthly payment $331.67. Monthly interest is the balance x APR / 12; for the two-week plan it is the balance x APR x 14 / 365, each rounded to the cent. The last payment is whatever is left.
| Plan | Time to pay off | Interest | Interest saved |
|---|---|---|---|
| Monthly, $331.67 | 36 payments, 36 months | $1,939.90 | |
| Every two weeks, $165.84 (half), applied on receipt | 71 payments, 994 days (about 32.7 months) | $1,722.44 | $217.46 |
| Monthly, $359.31 (one twelfth extra) | 33 payments, 33 months | $1,759.81 | $180.09 |
A year of half payments is $4,311.84, against $3,980.04 for 12 monthly payments: $331.80 more, about one extra monthly payment. Early in a loan more of each payment goes to interest and later more goes to principal (CFPB), so extra principal paid early cuts the interest on every later period.
The catch: how the lender applies the money
- Ask your lender how it applies a payment that is less than or more than the amount due. The CFPB warns, about student loans, that extra money can be credited against a future payment instead of the balance, which does not lower what you owe, and that you can ask the servicer to apply it to the balance (CFPB).
- If the lender holds a half payment until the other half arrives, the two-week timing gains nothing; only the 13th payment each year helps.
- A half payment on its own may be treated as a partial payment, with the full amount still due on your due date. Do not let the regular payment go late; see what happens if you miss a payment.
- Check for a prepayment penalty first. Your contract and state law decide whether you can pay early without one (CFPB); see prepayment penalties.
- On a precomputed interest loan, paying early does not save interest the same way; see precomputed interest and the Rule of 78s.
- If a company offers to run a biweekly plan for a fee, set the fee against the interest saved in a table like the one above.
A simpler way
Most of the saving comes from the extra money, not the timing. Adding one twelfth to each monthly payment ($359.31 instead of $331.67 in the example) saves most of it, $180.09 against $217.46, with no new schedule. Ask that the extra be applied to principal, and check the next statement. When you are close to the end, ask for a payoff amount rather than paying the balance shown; see payoff amount vs balance.
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.