Have you ever wished you could take a holiday from paying your bills? Well, be careful what you wish for. A colleague recent forwarded “Holiday Skip-A-Month” certificate from their credit union.
The accompanying letter reads:
Another year has passed and the holidays are approaching quickly. To help you make the most of the season during these tough economic times, [your credit union] is pleased to offer you the option to skip your November or December 2011 installment loan payment.
It’s easy. Simply indicate which month you want to skip on the certificate below and return it to [your credit union].
Use the extra cash for anything you need like shopping, parties, or to keep some extra money in your pocket during this busy time of year.
We truly appreciate your business and the excellent way you’ve managed your account. So please accept this offer to skip you loan payment in November or December. We hope it will make your holidays even more enjoyable. Mail or bring in your Skip-A-Month Certificate today.
Wow. That’s just wrong on so many levels. For starters, there’s a $35 fee for this “service.” And if you read the fine print, you’ll see the following:
“This offer is a bonus skip payment. Interest will continue to accrue on our loan and your original loan term will be extended.”
So yes, you get to skip a payment. But you also wind up extending the term of your loan (not surprising, since you still owe the outstanding balance) and you increase the total amount of interest that you’ll pay over the life of the line. All for the low, low price of $35.
Maybe I’m just being a Grinch, but here’s a tip… If you can’t afford to meet your financial obligations, then you should probably shop less and throw fewer parties. Skipping a payment while incurring interest costs simply isn’t worth it in the name of “keep[ing] some extra money in your pocket during this busy time of year.”
Based on a bit of Googling, this seems to be a pretty popular promotion at credit unions across the country, and all seem to have similar terms. You pay a $25-$50 fee for the privilege of extending your loan and increasing your total interest cost. And, in most cases, this seems to be an annual thing.
With rates on signature loans hovering in the 9-13% range for qualified applicants, a single skipped payment could easily add $100-$200 or more in interest payments over the life of a loan (depending on balance, term, etc.) and that’s not even including the service fee.
And if you do this every year over the life of a multi-year loan, the damage grows. And grows. And grows.
My advice? Instead of stringing out your debt, you should be trying to pay it off as quickly as possible. Yes, you might need to make some sacrifices in the short term, but in the long run you’ll thank yourself.