This time of year, it is common to receive a rather friendly suggestion that you can skip a debt payment. Some lenders will let you do this just for the month of December (“use the money to ease your holiday budget crunch”), and others will let you skip payments in January as well (“start your year out right”). Some institutions will even make this offer at different times of the year if you like, and these offers are very tempting. It sure seems kind of your lenders to provide you with this convenience, but are these institutional programs really all that helpful from a personal finance standpoint?
When you look at how such deals work, you might change your mind. First of all, it is important to realize that lenders and other creditors are in the business of making money. When you skip a payment, you aren’t being altruistically given a free pass from your debt that month. That payment is usually tacked on to the end of the loan term, with interest that never stops accruing.
Another consideration is the fee. Many of these deals come with a fee, usually between $25 and $50. You can skip your $300 car payment for a month, but you need to pay an additional $25 for the priviledge. The fee might also be added to the end of your loan term, so you don’t even have to pay that up front. Of course, once the fee is added to the end of the loan term, you start paying interest on that as well. If you make skipping a payment an annual event, you could even find your loan term extended by three to six months or more. It’s no wonder why the average Joe never pays off their balances.
What if you really do need to skip a payment?
For many, this option to skip a payment is more of a luxury than a need. You’d like to buy one more present this holiday season, or you think it would be a nice way to get a little breathing room in your budget for the month without cutting back on some of your unnecessary spending. But there are those who really are living on the brink, so what should you do?
If your money situation has deteriorated to the point where it is needful to skip a payment, then chances are that you have bigger money problems to deal with. Taking advantage of the skip a payment program can help you fend off your troubles for a month or so, but you will have to speak with your creditors in the end, and explain your situation. In these cases, you might be able to work out an affordable payment plan to meet your obligations. But if you really do need to skip the payment to make ends meet, an one-time reprieve is not likely to provide you the long term help you need.
No Payments for a Year!
Deals that allow you to avoid paying for the first six months or year might be said to fall into this category. Most dealers offering these promotions will keep track of interest during your payment-free period, and once you start making payments, all of that is capitalized and added to your total loan amount.
Same with interest free deals you see at retailers. If you don’t pay off the purchase in the stipulated “same as cash” term, you might find that you are charged interest for that period, or that you are charged a financing fee to turn your purchase into a loan going forward. In any case, rarely are you let off the hook in these types of deals. The whole point, from the dealer/lender standpoint, is to make more money.
The Bottom Line
In the end, you are better off doing what you can to pay up front. No matter what you do, you are likely to find that putting off payment will only result in owing more in the long term.