Is it Worth Skipping a Loan Payment?

Holidays or Year-Round, it's Rarely a Good Idea

Winter Break for Piggy
Your loan payments do not need a winter vacation. Peter Cade/The Image Bank/Getty Images

It’s always nice to get a break, but when your bank or credit union suggests that you skip a loan payment, it’s really more of a self-serving offer than a “gift”. Skipping a payment brings you short-term relief, but you’ll more than pay for that comfort – and the bank comes out ahead.

“Skip-a-pay” offers typically come around the winter holidays, but some banks allow you to skip one payment per year (any time of year).

The idea is simple: instead of making your required monthly payment, you can take a month off and have the money added to the back-end of your loan.

Especially at the end of the year, that money can come in handy. You might use it to buy gifts for loved ones, pay the heating bill, or pay off other debts that have built up. But it’s rarely a good idea to skip a loan payment – even when the bank has given you permission ahead of time.

The Cost

You know that you don’t get to skip the payment forever, and you might think you’re just postponing the payment. That’s true, but you’re going to pay more than just the amount you didn’t pay this year. For starters, you’ll pay a fee to the bank, somewhere in the neighborhood of $25 to $35. For some loans, that’s a decent portion of the monthly payment (if your payment was $100 and you pay a $35 fee, you’ve essentially made 35% of the payment – why not just pay 100% of it?).

The real cost comes later. When you add up the fee to skip a payment plus the amount of your loan that you didn’t pay off this month, you’re really just increasing the size of your loan. How much will that cost? It depends on your loan, but you can be confident that you’ll add a few months to your loan’s repayment period.

Example

Assume you owed $6,000 on your credit card on January 1st. The interest rate is 11.99%, and your minimum payment is 3% of your balance (with a minimum of $15). In November of this year, you take advantage of a skip payment offer, which costs $25 (your monthly payment would have been around $150). What’s the cost?

If you didn’t skip payments, you’d pay off the loan in 164 months and pay around $2,857 in interest (a little over 13.5 years making minimum payments – always pay more than the minimum). Skipping one payment means it’ll take 166 months to pay off the loan and you’ll pay around $2,943 in interest – note that that’s two extra payments (not just the one you skipped), with an extra $86 in interest. Granted, you’ll make those payments 10 years in the future, presumably with inflated dollars, but it’d be nicer to be done with your loan.

What if you skip payments for the first three Novembers (if you do this every year for a while)? It’ll take 171 months to pay off the loan – that’s seven extra payments vs. the three you skipped – and you’ll pay around $3,079 in interest.

A Better Option

In an ideal world, you’ll pay more than the minimum on credit card loans, and you’d pay down your installment loans regularly.

So how are you supposed to buy gifts and pay for surprises over the course of the year? Save money specifically for those purposes instead of robbing Peter to pay Paul.

If you buy gifts every year, then you already know that you’ll need some extra cash next year. Figure out how much you can afford, and set aside a portion of that expense every month so that you have what you need when you need it. Open a free online savings account to keep those funds separate from your daily spending money.

If you’re caught by surprise each year, build up an emergency savings fund to help you get through any minor disasters without taking on debt (or extending your existing debts).

Saving money and spending what you can afford to spend will keep you from falling deeper and deeper into a debt trap. Make your savings a habit and a priority so you’re more likely to make progress towards your goals.

You can do this with the practice of “paying yourself first.”