Weekly, fortnightly or monthly loan payments: which costs less?

Lenders often offer weekly or fortnightly repayments as well as monthly ones, sometimes with a claim that paying more often saves thousands. Paying more often does save a little. The big savings come from something slightly different.

Why frequency matters at all

Interest is charged on the balance you owe. Each payment reduces that balance, so paying more often means the balance falls a little sooner, and slightly less interest builds up between payments.

The same loan, three ways

Borrowing 20,000 at 8% a year over 5 years, with the amount of each payment and the total interest:

Paying weekly instead of monthly saves about 50 over five years. Real, but small. The Loan Calculator shows these figures and a full schedule for each frequency.

Where the big savings come from: paying more

The impressive savings people quote usually come from “accelerated” fortnightly payments: paying half of the monthly amount every two weeks. A year has 26 fortnights, so you make 26 half-payments — the equivalent of 13 monthly payments instead of 12. That extra payment each year goes straight to the balance.

Worked out with a simple model:

• On the 20,000 loan, paying 202.77 every fortnight clears it in about 4½ years, with about 3,870 of interest — around 460 less than monthly.
• On a 280,000 mortgage at 6.5% over 30 years, paying half the monthly 1,769.79 every two weeks clears it in about 24 years, with roughly 82,000 less interest.

The saving is not caused by the frequency itself; it is caused by paying the equivalent of an extra month each year. You could achieve almost exactly the same by paying monthly and adding one-twelfth extra to each payment.

Fortnightly is not the same as twice a month

Paying every two weeks gives 26 payments a year. Paying twice a month — on the 1st and the 15th, say — gives 24, exactly the same yearly total as monthly. Only the fortnightly schedule produces the extra month's worth of payments. When a lender offers a “bi-weekly” plan, check which one they mean, and whether each payment is half the monthly amount or recalculated.

Matching payments to pay day

The best reason to choose a frequency is your income. If you are paid weekly or fortnightly, matching your loan payments to pay day makes budgeting easier and avoids the squeeze of one large monthly payment. That convenience is often worth more than the small interest difference.

Check before switching

• Some lenders charge to change payment frequency, or for overpaying.
• Some apply extra payments to future instalments rather than reducing the balance. Ask how overpayments are applied.
• Fees and insurance are not included in these figures; compare total costs from the lender.

For how each payment splits between interest and principal, see how EMI is calculated; for home loans with tax and insurance, the Mortgage Calculator. These are illustrations, not financial advice.