Difference Between Fortnightly and Monthly Loan Repayments

Fortnightly vs Monthly Loan Repayments

Fortnightly and Monthly Loan Repayments are the same by all means except for the frequency of the repayment schedule that results in reduced interest payment and thus reduce the loan term. When you borrow money from a bank or any other financial institution for that matter, the most common form of repayment is in equal monthly instalments. The banks apply different types of interest rate depending on the purpose of your loan, the amount you borrow, the loan term and the risk involved. Say for instance, if you borrow home loan from a bank, naturally the amount you borrow will be few hundred thousand dollars for a period of 15 years or more. Then the banks apply reducible interest rate on your borrowing. In the case of reducible interest rate, the interest is calculated on the balance you owe the bank at the time of repayment. So if you shorten the repayment schedule, the interest you have to pay will reduce and thus at the same rate of repayment you can settle the loan faster than planned or in other way you can reduce the instalment amount. Let us learn that in detail below.

Monthly Loan Repayment

For the explanation purpose we will say that you have taken a home loan of Dollars 400K at a reducible interest rate of 5% per annum for a period of 30 years from a bank. Now under monthly loan repayment scheme you have to pay back the bank by equal monthly instalments. Banks have charts or on- line tools to calculate the monthly instalments. For the home loan we have taken in this example, the fixed monthly repayments will be roughly $2,148

With reducible interest, the interest for that month is added to the outstanding balance and then the fixed monthly repayment is deducted. The balance will be taken for the next interest calculation. As the balance reduces, the interest added also reduces and the debt is cleared at a faster rate.

Interest rate = 5% or 0.05 p.a , so monthly interest rate will be 0,05/12

At the end of first month,

Outstanding balance = (Principal) 400,000 + (Interest) 400,000(0.05/12) = 401,667

Amount owing to the bank after first month = 401,667 – 2,148 = 399,519

At the end of second month,

Outstanding balance = 399,519+ 399,519 (0.05/12) = 401,184

Amount owing to the bank after second month = 401, 184 – 2,148 = 399,037

At the end of third month,

Outstanding balance = 399,037+ 399,037 (0.05/12) = 400,700

Amount owing to the bank after third month = 400,700– 2,148 = 398,552

So if you see here the interest you have to pay is continuously reducing. From your fixed monthly instalment what you pay is the interest for the period and part settlement of the principal. As the interest is reducing, your debt is cleared at a faster rate.

Fortnightly Loan Repayment

The time taken to repay a loan will be reduced even further if repayments can be made at a very regular frequency such as fortnightly or weekly. Fortnightly repayment is paying an equivalent of half of your monthly repayment every fortnight (every 2 Weeks).

By repaying at this frequency you will have a considerable saving on interest. We will explain this taking the same example above.

The fortnightly repayment for the said loan will be roughly $ 1,074

Interest rate = 5% or 0.05 p.a , fortnightly interest rate will be 0,05/26 (52 weeks in a year, so 26 fortnights)

At the end of first fortnight,

Outstanding balance = 400,000 + 400,000(0.05/26) = 400,769

Amount owing to the bank after a fortnight = 400,769– 1,074 = 399,695

At the end of first month (2nd fortnight),

Outstanding balance = 399,695 + 399,695 (0.05/26) = 400,463

Amount owing to the bank after first month = 400,464 – 1,074 = 399,390

At the end of third month the principal you owe the bank will be reduced to $398162.

In the monthly repayments, the debt after three months is $399,552. Though initially you don’t see much difference between fortnightly and monthly repayment as time goes you will see the interest you have to pay will reduce fast and your monthly instalment will be used to offset an increased part of the principal. Thus your debt will reduce faster than in monthly repayment. This will in effect reduce your loan term substantially. In the example we have taken your loan term will reduce by 4 year and nine months.

Difference between Fortnightly and Monthly Loan Repayment

Loan repayments are generally calculated on a monthly basis. However, you have the option of repaying weekly, fortnightly or monthly. Paying fortnightly is simply paying the equivalent of half of your monthly repayment every two weeks.

By repaying fortnightly you can squeeze in the equivalent of one extra monthly repayment per year.

To explain it further, under monthly repayments, after a year you would have paid $2,148 x 12 = $25,776. In fortnightly repayments, you will pay $1,074 x 26 = $ 27,924.

This is equivalent to one additional monthly instalment. This amount will go to offset your principal. By reducing the principal amount, on which future interest will be calculated you are saving on interest payment. As the interest is reduced now, more of your monthly repayment will go to set off against the principal. The effect is, you can settle your loan sooner than expected.

In the example taken in here, under monthly loan repayments the loan term is 30 years whereas if you opt for fortnightly repayments your loan term will reduce to 25 years and 3 months.