Payments are made voluntarily by a borrower to reduce the overall loan amount and save on interest expenses.
Accelerated Payments Details
When it comes to loan repayments, accelerated payments are voluntary payments you make to reduce your loan's outstanding balance; doing this will also save you money on overall interest paid. When recorded, accelerated payments go towards the total loan balance, reducing the amount of interest paid over the loan's life.
While many loans allow for accelerated payments, some loans do not allow accelerated payments. Make sure to check with your lender before you begin making accelerated payments on your loan. There may be stipulations on how much of your loan you can accelerate or how often you can accelerate your loan during its life. The most common loans that allow accelerating payments include mortgage loans, car loans, student loans, personal loans, and credit cards.
If you can make accelerated payments, it is best to do so on a schedule to reap the benefits of consistent extra payments fully. There are several options for borrowers to choose from when wanting to make accelerated payments. The most common accelerated payments include bi-weekly and weekly loan payments.
- Bi-Weekly Loan Payments: You pay 1/2 of your payment every two weeks on the same day, for example, every other Wednesday. By doing this, you'll end up saving on interest in the long run because you're making the full payment in two small chunks each month. To calculate bi-weekly loan payments ((Monthly Amount*12)/26 pay periods).
- Weekly Loan Payments: You pay four equivalent payments four times a month (i.e., 1st, 7th, 21st, and 28th of the month) for a total of 52 payments a year. Making these payments can cut out a decent chunk of the total loan balance still due, saving you paying on interest in the long run. To calculate weekly loan payments ((Monthly Amount*12)/52 pay periods).
Example of Accelerated Payments
As an example, let's use student loan debt. Karen has $46,000 in student loan debt. With a 2.75% interest rate. At its current rate, Karen pays $438.89 per month towards her loan.
If Karen decides to pay bi-weekly on her student loan, she will pay 1/2 of her $438.89 payment on March 3rd and then the other half on March 17th. Her total bi-weekly payment will be $203.
((Monthly Amount*12)/26 pay periods)
(($438.89*12)/26) = $203
If Karen decides to pay weekly on her student loans, she will make a loan payment four times a month or once a week. Beginning on March 3rd, March 10th, March 17th, March 24th, and March 31st, her payment will be $101. In this example, March has five Wednesday payments that accelerate her by $66.11 for the month. Karen will receive a credit of $66.11 towards the principal balance on her student loan.
((Monthly Amount*12)/52 pay periods)
(($438.89*12)/52) = $101
($101)*5 = $505
$505 - $438.89 = $66.11
Accelerated Payments vs. Accelerted Clause
While accelerated payments are seen as a positive way to improve financial standings and pay off loans faster, an accelerated clause is quite the opposite and can be detrimental for many borrowers.
An enacted accelerated clause happens when a borrower fails to meet the requirements of the loan. The lender then requires the borrower to accelerate their total amount owed in 30 days.
Following the example above, if Karen defaults on her loan, she will be required to pay the full loan amount of $46,000 in 30 days. The payment also includes the interest the lender will be losing on the life of the loan.