As the holiday season approaches, you may notice that some banks and credit cards will offer you a “skip a payment” special on the loan. I recently had a question from a reader regarding this, and thought addressing it would be a good idea.
Skip a payment
Inducing you to skip a payment is one of the new ways for lenders to make even more money off of you. Here’s how it works:
Sometime in the next couple of months, you receive a coupon from your lender. It tells you that all you have to do is return it, with a processing fee (between $25 and $60), and you can skip your next month’s payment. “Use the money for holiday shopping!” crows the accompanying letter. You start to think that a $25 fee is much preferable to a $250 car payment, so you go ahead and fill out the coupon. Now you have an “extra” $225 for the month.
Unfortunately, it isn’t as money-saving as it seems.
The real cost of skip a payment
While doing a skip a payment in this way will not affect your credit score, it is not the best of financial planning moves. Why? Because the lender quietly hides the real cost of such offers. My yearly offer to skip a payment is a good example.
I make a $200 a month car payment. Every year, my bank sends me an offer in November to “make the holidays less stressful” by offering to let me skip a payment. The fee: $25. But here’s what’s in the fine print: The fee does not go to interest or principal. Also, the interest and principal for that month are capitalized and added to the end of the loan. SO, the $67 that usually goes toward interest is a cost. $67 + $25 = $92 this skip a payment costs me. Not to mention lengthening out how long I have the loan. And what if I did it every year of my five year loan? More payments and a longer term.
Skip a payment not the best idea
While the skip a payment does the lender a favor, you really aren’t getting much out of the deal. Except maybe some short-term relief. Depending on the loan, and how much you owe, and how much of that goes to interest, you could end up paying on this “mini loan” (which is what a skip a payment really is) what amounts to 500% yearly interest rate. No good. The best policy when it comes to personal finances is to make your payments each month. You can usually tighten the belt a little and still enjoy a good holiday. And you keep more of your money in the long run.