Home Banking & Credit The Perils of Skipping Loan Payments This Holiday Season

The Perils of Skipping Loan Payments This Holiday Season

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The holidays are fast approaching and that means there are presents to buy, trees to trim and merriment to be made, all of which will cost you money. Fortunately, your credit union, bank or credit card issuer may be willing to let you skip your monthly payment in December or January.“Skip-a-pay [programs] are a popular way for banks to add quick fee revenue while giving their clients some extra cash in their pockets,” says John Oxford, a spokesman for Renasant Corporation, which operates 171 banking, investing and wealth management offices in the South. While Renasant Bank previously offered a skip-a-payment program, it does not currently have one.At other institutions, these programs allow customers to skip their monthly payment in exchange for a small fee. Some lenders may even donate a portion of the fee to a local charity so it seems like a win-win for all involved.Not so fast, say some financial experts. Skipping one payment might not seem like a big deal, but it can have a negative impact on your finances.5 Reasons to Skip the Skip-a-Payment OptionRich Hyde, the COO of Prestige Financial Services in Salt Lake City, works with clients trying to raise their credit score and finds some use skip-a-payment programs to stretch their money through the holidays to buy gifts for friends and family. Although skipping a payment may be preferable to racking up debt on a high-interest credit card, it doesn’t come without drawbacks.You lengthen the term of your loan. You may be skipping a payment, but you’ll still need to eventually make it. “They are essentially letting you take the payment from December or January and adding it to the life of the loan,” says Kelsa Dickey, owner of Fiscal Fitness Phoenix. Skipping a payment every year means you could be paying an auto loan for five to six months longer than originally planned.You add to the interest you pay. Not only will the term of the loan be longer, but you’ll pay more interest as well. A $5,000 credit card balance at a 24.99 percent APR accrues roughly $100 in interest each month. As a result, skipping a payment means you’ll end up owing more the next month even if you haven’t used your card.You might forget to make the following payment. Hyde is concerned skipping one payment might snowball into several payments. “Customer behavior can be impacted [by skipping a payment],” he says. “Anything that gets people out of the habit of paying is a bad idea.” You could ding your credit score. If you do happen to forget the next month’s payment, than you could see a drop in your credit score. Plus, you’ll likely get hit with a late fee which typically runs around $35. Dickey adds that some people might be tempted to skip payments even if their lender doesn’t offer a skip-a-payment program. However, doing so could negatively impact your credit score and damage your relationship with the lender, making it difficult to receive loans or lines of credit in the future.You are reinforcing poor money habits. While all the above reasons are enough to say “no thank you” to skipping a payment, Dickey says there is one more to consider. “By skipping a payment, you’re saying Christmas gifts are more important than something like a car that gets you to and from work,” she says. “There’s a much deeper rooted problem of putting things that are not essentials in front of things that are essentials.” Declining to skip a payment is one step toward creating healthy money habits and smart spending priorities.When Skipping a Payment Might Make SenseWhile experts say skipping a payment to buy gifts doesn’t make much sense financially, there may be a time and place for skip-a-payment programs.“If a consumer wants to free up cash for the holidays and doesn’t mind a minimal fee and an added month on their loan, it can be a beneficial short-term move,” Oxford says, “but it should not be used to avoid a payment just because the offer is there.” To minimize the impact of skipping a payment, he recommends people use a portion of their tax refund, if possible, to make an extra payment later in the year. For people who are in a bind and considering a payday loan or going into debt to pay the bills, Hyde says skipping a payment would be the lesser of two evils. Meanwhile, Dickey believes using a skip-a-payment program is understandable in cases of unemployment. “If it comes down to putting food on the table, yes [skip a payment],” she says.Skipping a payment may also be a good strategy if you are planning to use the money from that payment to wipe out a high-interest debt. Installment loans, such as those for cars, typically have a much lower interest rate than what might apply to a credit card. Financially, it might make sense to skip an auto loan payment for one month, and send that money to pay off a credit card account.However, Dickey says most people don’t skip payments for strategic reasons. Instead, they do so to spend more on gifts or holiday deals. She asks, “If your parents knew you were skipping a payment or going into debt to give them a gift, would they want it?” She’s betting the answer is probably no. .

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