A question for the mathematically "advantaged"

[mbowers]

Which is better for the car dealer - a 36-month finance contract, or a contract the requires 78 bi-weekly payments. Which is better for the customer?

[texaslp]

Better in what respect? Unless you're talking about BHPH, it should make no difference to the car dealer except maybe a slight difference in reserve.

For the consumer, if their pay period's are bi-weekly then in terms of budgeting for the payment then bi-weekly is better.

[TheOne]

Agreed it makes no difference to the dealer unless it bumps the customer up a finance tier in which case it could allow for a better rate spread for the dealer.

As for the customer assuming that the financing is not zero interest it would be advantageous in that the total finance charge would be lower.

[deboss]

If I entered the info correctly:
20K @7.5 36 Months = 2396.32 total Interest
20K @7.5 78 Biweekly = 2329.06 total Interest

$67.26 less interest if it goes to term. The dealer reserve would be slightly less unless it was a flat deal.

[mbowers]

The answer is:

Bi-weekly is more profitable.

You are all correct in pointing out that the total interest paid will not change. That would be true even if the customer made only one annual payment.

By accelerating the payment schedule to bi-weekly, the principal balance on which the interest is paid declines faster. So, in theory at least, the dealer's finance reserve should be larger relative to the amount being financed.

I'm working on an article about bi-weekly payments. The concept has moved beyond the BHPH stage and is beginning to get some traction in conventional dealerships.

I'd be interested in hearing from any dealers that are using bi-weekly payments as part of their F & I program.

[deboss]

"You are all correct in pointing out that the total interest paid will not change. That would be true even if the customer made only one annual payment."

I do not think this is stated correctly.

If I borrow 10K and pay it off one year from now I will pay interest on the total 10K for the full year. If if make 12 payments the principal is reduced each month and therefore the interest will be less. My previous example illustrates this on biweekly versus monthly. The difference of annual over equal monthly payment would be more substantial.

Have not heard from them lately but at one time there were persons promoting this concept and offering to set it up (for a fee) on you home loan.

[arnien]

Often, I get letters from my home mortage company, wanting to draft my bank account bi weekly to pay my home mortage a few yeares sooner. i have not done so, as I pay extra each month on the prinicple, and my late wife, a former FDIC employee did not like bank drafts.

[texaslp]

I've heard of people paying bi-weekly on home loans. If they take their calculated payment and divide in half and pay every two weeks, then they're making an extra payment per year.


It probably makes more sense on a home loan because you're talking about a much larger loan and for a much longer period of time so whittling away a little bit of interest here and there adds up.

[cantfind12]

Are we talking about making money or making a living? Of course what qualifies as "living" is dependent on how many and how big the Video Augmentation Devices are in your house.