Skip a Payment?!

Get a load of the “gift” that reader Julie W. got in the mail from her bank several months ago:

Dear Julie: 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 fee 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.

Because Julie thought she smelled a rat she sent me the offer for dissection and complete analysis.

Here’s the deal: Julie is a little more than one year into a five-year auto loan that has monthly payments of $348. Accepting this deal to skip one of those payments will cost her a privilege fee of $60.

But that’s not all. The interest that is due but won’t be paid during the skipped month gets added back into the loan. Her outstanding balance will immediately increase by about $85. (That’s how much of her $348 payment is interest at this point in her loan.)

I loaded all the pertinent figures into a financial calculator and learned that for Julie, this deal has a $167 price tag on it (the $60 she has to pay up front, the $85 interest from the skipped payment, plus $22 additional interest on the $85).

Here’s another way to look at it: Julie’s bank is offering to lend her $348 for one month at a cost of $167. That translates to an annual percentage rate of 577%! So much for truth in advertising.

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 show 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 had $0 due this month.

Without scrutinizing the fine print, many delighted customers will assume they’re the beneficiaries of some kind of computer glitch they hope no one will discover.

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.

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