If offered, would you put off a car payment?

[sounderella]

Ok, so I received a letter in the mail today from my bank. It says since I've been so good on paying my car they're offering me the chance to skip a payment either Jan or Feb for a fee of $35....of course this will just be tagged back on to the end. My car payment is $285 with an interest rate of 8%.

My question is, would you skip it to place on a 19% c.c. to pay it off faster?

[Hypersion]

19% - 8% =

11% * 285= You wil only save $31.35 but you have to pay a fee of $35 it's not worth it.

[Tree0164]

Nope we receive one each year we have from our car loan company. it is just a way for the banks to earn extra cash.

[InDebtInDC]

19% - 8% =

11% * 285= You wil only save $31.35 but you have to pay a fee of $35 it's not worth it.

Respectfully, interest rates are typically given as an annual percentage rate (APR). In order for your calculations to be correct, the quoted numbers have to be expressed as an monthly percentage rate (MPR), which would yield 96% on the car loan.

Annual percentage rate - Wikipedia, the free encyclopedia

The correct way is to scale the APR down to an effective daily periodic rate, e.g. 8%/365days = 0.022%/day of interest.

0.022%/day X 30days/month = 0.66%/month

Also, that is not how you calculate the cost of capital for the loan. You cannot just take the effective periodic rate and multiply that by the monthly payment. You have to multiply the effective periodic rate by the outstanding balance on the loan. Since we don't have the balance amount this calculation cannot be performed.


sounderella, your question is a very basic financial analysis where you typically have an investment and you want to calculate if it's worth it to take the investment.

You want to pick the decision that will net you the most money. The difficulty is because we don't know the following:

1) balance of the car loan
2) length of car loan
3) balance of CC
4) minimum payment of CC
5) your disposable income
6) your other debts costing you more than 19%

Conventional wisdom dictates that you pay all of your loans off as quickly as possible. In applying this wisdom, you would pay both the car loan and the CC minimum payments and apply any remaining disposable income to the CC balance. Anything you have leftover you apply to the car loan. This method renders your question moot because you do not want to skip any monthly payment. You also save the $35.

I cannot calculate the numbers for you because I also don't know the period of your car loan. If the $35 is tacked onto the balance, this number will undoubtedly cost you more than just $35.

If you are strapped for cash and simply do not have money to pay both the car and the CC (less than $285+mininum CC payment), then you have no choice except to take the $35 hit and skip a month on the car and pay the minimum on the CC. If this is the case the calculation is moot and you will have to skip the car loan for a month.

If you have more than enough cash to pay both loans (more than $285+minimum CC payment), then you would consider options A and B listed below.

A) Pay $35 and put off a loan with an unknown balance, 8% APR, and $285 monthly payments. You then use the $285 and apply it to your alternative investment with the highest opportunity cost. Since it's very unlikely that you will be able to earn more than the 19% APR of your CC with an unknown balance after taxes and expenses, I'll assume that your opportunity cost is 19%.

B) Forgo the $35 offer and pay the car loan like normal.


Simply put, this calculation is more complicated than you would think because I need to do an 4 amortization tables: 1) for the car loan with no skipped payment, 2) for the car loan with skipped payment, 3) for the CC with no extra payment, 4) for the CC with extra payment.

I would then calculate the effective cost for each amortization table adjusted for time and a riskfree rate. I would then add this effective cost for tables 1+4, and tables 2+3. Whichever pair yields the lowest effective cost is the one you go with.


If you have no idea or care about what I said, just pay the minimum on both loans. Don't skip. Anything you have leftover you pay down your CC. Once your CC is paid off we can talk about if you should pay down your car or save your money.

[sounderella]

Wow thanks for all the help! I do have enough to pay both but you know I'm always looking for a way to get ahead. I thought it would be a negative since it was going to cost $35 but sometimes it's always good to ask

[Ima saver]

No, I would not do it!

[InDebtInDC]

Wow thanks for all the help! I do have enough to pay both but you know I'm always looking for a way to get ahead. I thought it would be a negative since it was going to cost $35 but sometimes it's always good to ask

If you have $285+CC minimum or less, then we would need to calculate. If you have more, there is no argument. Just pay them both.

All you would be doing is to drag out your car loan another month and adding $35 of principal to the loan.

Good question though. It shows that you're thinking and not just making random financial decisions.

[InDebtInDC]

No, I would not do it!

I personally wouldn't do it either unless I was very strapped for cash.

[filifefc]

I really don't see any savings here by doing that...

[InDebtInDC]

I really don't see any savings here by doing that...

There are only 2 situations where skipping the payment would be advantageous:

1) if you just simply do not have enough to make both payments. Skipping the car payment allows you not to have a missed payment.

2) if you have a sure-fire investment that will net you say 100% or more in returns for 1 month.

But even if 2 were the case, I'd say be wary because there is not such thing as a sure thing.

[cptacek]

Good question though. It shows that you're thinking and not just making random financial decisions.

I agree. There are some rules of thumb that work for a given situation and some that don't. YOU (general you) have to decide which one works best for your situation, and thinking outside the box can help you get further down the road.

[Snoopy2645]

not if they are charging a fee

[InDebtInDC]

not if they are charging a fee

The fee in and of itself is of little consequence. It's the amount of the fee that lowers the benefits of the alternate investment.

[Exile]

With many years of employment in auto loan collections, I can tell you that skipping a payment and having it tacked on to the back end of your loan is great deal--for the lender!

If you can afford to pay both your auto loan and c.c., do so. Skipping payments, whether approved or not, is setting yourself up for a fall.

The longer the loan contract, the more difficult it is to predict one's financial condition when the final payment comes due. Wouldn't it be ironic that the month in which that deferred payment comes do is the time that you're financially strapped?

Creditors are always looking for a way to add fees and keep their customers indebted. Don't play their game!