Will a biweekly payment plan really save you money on your car loan?

According to Experian’s latest quarterly report the average amount financed on a new car loan is $30,621. With the average loan term and interest rate at 68 months and 4.69% respectively, an average car buyer would end up paying $4308.49 in overall interest. For many of us that’s a lot of money. It’s no wonder “tens of thousands of people” sign up for so-called loan payment acceleration plans who claim to help them pay off their loans faster and save tons of money on interest.

These plans, typically offered through car dealerships on behalf of third party companies, promise huge benefits when you make smaller payments on a biweekly schedule that matches your payday, all with “no upfront costs.”

In our average Joe scenario above the total amount owed to the bank, with interest, comes to $34,929.49, or $513.67 monthly. On the biweekly payment plan Joe’s monthly payment amount would get split in half and he’d make payments of $256.84 every two weeks. That’s 26 half payments each year, or the equivalent of 13 total monthly payments, which amounts to one extra payment each year. On this plan Joe could pay off his loan 5 months early and save $355.22 on interest.

Given those numbers, Joe might jump at the chance to sign up for such a plan, either through his dealer or on his own. But I think it’s safe to assume that you are smarter than the average Joe. I mean, you’re here on Finance Globe educating yourself, right? You are going to look before you leap so you can make an informed decision about whether a loan payment acceleration plan is right for you.

Recently, clients of National Payment Network Inc. (NPN) found out the hard way that their plan was not right for them. In March of 2015 the Federal Trade Commission sued NPN for deceptive enrollment practices, wherein they and the car dealerships who sold their products misinformed or failed to inform people about fees associated with their “service.” The hidden fees often outweighed any savings touted by NPN and their representatives. With an enrollment fee of $399, a processing fee of $2.99 collected on each payment, and a $25 cancellation fee (often charged when clients “cancelled” at the natural end of their plan’s term) a standard 5 year loan paid through NPN ended up costing clients over $775. Our friend Joe, with his 68 month loan, would lose well over $400 had he signed up for this plan!

There is a happy ending to this cautionary tale. The FTC ordered NPN to pay nearly $2.5 million in refunds and waived fees to their customers and is no longer in business. But several other companies with an eerily similar business model still exist. You would think that after news of NPN’s fate anyone who sells loan acceleration plans would take heed and err on the side of transparency. Unfortunately, that wasn’t the case for someone I know.

My friend (who has asked me not to name him) bought his truck in August of 2015, months after the NPN case had been settled and more than a year after car dealers received a memo from the National Automobile Dealers Association with news of pending legal action for dealers who overstated benefits of biweekly payment plans and did not accurately disclose fees. Still, his dealer talked him into signing up for one of those plans, with promises of all the money he’d save and no mention of any fees.

Fortunately, he realized before it was too late that he had been duped. When he reviewed his biweekly payment plan contract he discovered the total cost of the fees would outweigh his savings by $253. Adding insult to injury, he also found out that paying off his loan early would incur a penalty of $125 with his bank.

Based on the experiences of NPN customers and my friend, the benefits of enrollment in a loan acceleration program are clearly not as huge as its proponents would like us to believe. So it would seem we’ve arrived at an obvious answer to the question of whether such a program is right for you. Sometimes it makes sense to spend some money in order to save money. This is not one of those times.

It is, however, possible to accelerate your loan payoff without paying hefty processing fees. You might be able to make arrangements directly with your bank to pay off your loan early with a biweekly system and save on total interest.

First, you will need to read all the fine print on your financing contract. If the terms include an early payoff penalty (aka, “prepayment penalty”) take some time to figure out how much that will cost. If the penalty ends up costing more than the amount you’ll save on interest you might be better off paying the loan according to the timeline spelled out by your bank. There are several free online calculators that can help you do the math.

If it turns out the savings will significantly outweigh the cost of the early payoff penalty, or if there is no penalty at all, it might behoove you to start your own biweekly payment plan. Before you do make a call to your bank to ask if they will allow you to do so. If they do, find out how they process extra payments. Some banks will automatically apply the extra payment to the principal, which will reduce the total interest significantly. Others require you to follow a special protocol to ensure your payment is applied as you intend it to be.

As with all money matters, when considering whether a biweekly payment plan is right for you, doing your homework and reading the fine print will always serve you well.

Sources: acalculator.com, Better Business Bureau, Experian, Detroit Free Press, Federal Trade Commission, Forbes