Holiday Cash? Not So Fast…

We’re right in the thick of the holiday shopping season, and a few extra bucks sure would be welcome right now. Hey, here’s something from my car loan lender, offering me the opportunity to skip my car payment in December… Sounds tempting.

Many lenders make this offer each year to their borrowers and it’s an offer than appeals to many who might be a little strapped during the holiday season. Whether you should take the offer depends on your specific circumstances, though, and you should know the facts before you jump right in.

First of all, it’s important to understand that your lender isn’t making this offer out of simple generosity or the spirit of the season. There is a profit motive. While it may keep a few hundred dollars in your pocket in December (or more likely allow you to spend that money elsewhere), they’re not actually giving you the money – the December payment is just added to the end of the loan.

What does this mean for you? Well, it means that the principal balance on your loan stays higher just a little longer, and that means you’re charged interest longer. Profit for the lender.

Now, this isn’t the worst thing in the world, as pushing one payment back likely won’t cost you a lot. But one lender crunched the numbers and came up with the following analysis: For a car loan of $20,000 financed for 6 years (72 months) at 6% interest, a borrower would pay $380.89 in extra interest over the life of the loan, if they skipped their payment every December.

That might not seem like a lot of money, especially spread out over six years, but who wouldn’t like to have an extra $380.89? And remember, with a higher interest rate, expect that $380.89 to grow substantially.

Your car loan lender might not offer this opportunity, of course, so you might not be faced with this decision. But now you have the facts in case the situation arises.