Get a load of the “gift” that reader Julie and Brad W., got in the mail from their bank several months ago:
Dear Mr. and Mrs. W: Summer is the time for great vacations. So start with a vacation from your loan payments, with Skip-a-Payment. Three easy steps put extra cash in your pocket!
1. Mail the attached Skip-a-Payment coupon in the enclosed envelope.
2. Include a check for $60 to extend your payment.
3. Please be sure to write your loan number on your check.
That’s all there is to it! Instead of sending us your usual loan payment, use the money for a vacation getaway, a new gas grill, graduation or wedding gifts, plants, and gardening supplies—whatever you want! Skip-a-Payment puts you in control!
With Skip-a-Payment, you have more financial options and the flexibility you need to handle life’s opportunities—and emergencies. After all, who couldn’t use a little extra cash now and then?
P.S. Payment of the $60 extension fee will not be applied to the principal, interest, or other fees that might be due on your loan. Any additional interest that accrues due to this deferred regular payment will be due and payable upon maturity.
What’s that smell?
Because Julie thought they smelled a rat, she sent me the offer for dissection and complete analysis.
Here’s the deal: Julie and Brad are a little more than one year into a five-year auto loan with monthly payments of $348. Accepting this deal to skip one of those payments would have cost them a “privilege fee” of $60.
But that’s not all.
The interest due but won’t be paid during the skipped month gets added back into the loan. Their outstanding balance will immediately increase by about $85 (that’s how much of the $348 payment goes to interest at this point in her loan).
I loaded all the pertinent figures into a financial calculator. I learned that for these kids, this deal has a $167 price tag on it (the $60 she has to pay upfront, the $85 interest from the skipped payment, plus $22 additional interest they’ll pay on the $85 until the loan is paid in full).
Here’s another way to look at it: Their bank is offering to lend them $348 for one month at the cost of $167. That translates to an annual percentage rate of 577%. So much for truth-in-advertising.
Just an anomaly?
So is this an isolated case? Don’t make me laugh. This skip-a-payment ploy has become a lucrative source of revenue for lenders. Millions of offers to skip payments recently showed up in mailboxes across the country disguised as rewards for good behavior. Or entitlement to go Christmas shopping instead of paying one’s bills. Some quietly announced that you have $0 due this month.
Without scrutinizing the fine print, many delighted customers will assume they’re the beneficiaries of a computer glitch they hope no one will discover.
Skip-a-payment coming for you
If you ever get an offer from a creditor to skip a payment, I suggest you follow Julie’s example by first shrieking in horror, “Are you out of your ever lovin’ mind?” Then politely decline the offer.
Or find sweet revenge in returning the offer along with a double payment! That’ll show them who’s in control.