Reducing Mortgage and Car Expenses

Arthur Vidro
ON CONSUMERISM
There are ways to save on mortgage payments.

Are you making one large mortgage payment every month? Try taking half the amount and paying it every two weeks. Is that doable for you? It is for many.

The advantage is that instead of making 12 monthly payments per year, you end up making the equivalent of 13 monthly payments per year. Because there are 52 weeks in a year, by making a half-payment every two weeks, you end up making 26 biweekly half-payments. Which corresponds to 13 monthly payments.

This pays off your loan principal faster and decreases the overall amount of interest you pay for the privilege of having borrowed the money.

Let’s illustrate. If you have a $200,000 mortgage with a 30-year term and a 5% interest rate, switching to the biweekly method would pay off the mortgage in about 25 years instead of 30, and would save you about $34,500 in overall interest.

Remember, the longer the duration of your mortgage payments, the more you end up paying in interest.

Since you’re not contracted to make the payments every two weeks, there is no punishment for lapsing back into the monthly method.

It’s also more economical to make a larger down-payment or buy a smaller house. Or both.

Now let’s look at car loans.

We drive a 2013 car we bought in 2018, when it had 70,000 miles on it. It’s not fancy, just a low-end car, not a truck, not an SUV, and with as little computerization as possible. Because of its mileage and age, we were able to scrape together just enough money to buy it without taking out a loan.

But our prior car, a Saturn, was bought new in May 2002. It was a low-end car, not powerful, not big, not impressive. The purchase price was roughly $17,000; I did not make a down-payment, but my trade-in netted me $2,750, so the amount financed was about $14,200. I borrowed from General Motors and agreed to a 48-month payback schedule at $331.78 a month. But I rarely paid that amount. Usually I was able to swing two payments at once, and pay off $663.56 at a time, once each month. In a little over two years the car was paid off, fully mine, and we had saved a good amount of money in interest.

Once the car’s title transferred fully to me, I canceled much of the car’s insurance. No longer insured it against windshield breakage. Or theft. Or getting banged up in a collision. I kept the insurance for any damage we might cause to other vehicles or other people. (Not that this insurance ever came into play.)

By buying a cheap car, I saved money. By paying off the car loan quickly, I saved more money. By reducing my insurance coverage (which you can’t do until you fully own the car) I further cut back my expenses.

But for reasons I don’t understand, most people buying a car don’t look at the low end of the market. They want the biggest, flashiest, most advanced car they qualify to buy. Then they spread the payments out as far into the future as possible – often six years! – solely to reduce the size of the monthly payment. As a result, they end up spending far more for the car itself, far more for loan interest and far more for insuring the car.

Right now, about 17% of new loans for cars require monthly payments exceeding $1,000. People are buying vehicles that are big, fancy, and expensive.

Remember, the longer the duration of your car payments, the more you end up paying in interest. It’s more economical to make a larger down-payment or buy a less fancy car. Or both.

If you want to avoid such big payments, don’t buy a $50,000 vehicle. Buy one that costs $30,000 or less.