Consumer auto payment holidays aren’t all they’re cracked up to be, subprime lender Prestige Financial Services says. Though it can be a helpful bit of cash in the short-term, it will hurt borrowers financially in the long run.
Dealerships sometimes offer vehicle buyers the opportunity to delay, or “skip,” a payment over the holidays based on a lender’s promotion, said Prestige Financial COO Rich Hyde. If a consumer buys a vehicle in November, for example, the dealership offers the opportunity to make the first payment in January, rather than December.
Lenders also allow existing customers to skip a payment in December. But when customers decide to skip that payment, they ultimately pay more interest over the course of the loan, Hyde said. If a consumer took advantage of the payment holiday once, he or she would extend the term by one payment, plus that additional interest.
If consumers need the extra money immediately, skipping a payment would be helpful at the time, but it will cost them over the life of the loan.
“The payment is tacked onto the end of the loan, and there is more interest based on higher principal balance,” Hyde said. “Instead of the benefit of principal reduction, the consumer will pay additional interest costs.”
For example, if customers borrow $20,000 with a 6 percent interest rate over a 72-month term, their monthly payment would be $331.46. Without skipping a payment, they would pay $3,867.14 in interest over the life of the loan. If they skipped a payment every December, their interest payment would be $4,247.53. That’s about $380.39 in additional interest paid over the loan term, which is higher than the cost of one monthly payment.
Although that is not a huge dollar amount, Hyde said, it is 10 percent more interest over the loan term.
Forgetting to pay
Skipping a payment can also change consumer behavior, Hyde said.
Delinquencies tend to rise in January because people got out of the habit of making their monthly payment, he said.
For Prestige, offering payment holidays would be counterproductive, Hyde said. As a subprime lender, Prestige wants to keep people on track with making their payments and increasing their credit scores.
“Every January you can count on delinquency spiking,” he said. Consumers “just forget.”
The real benefit is for the lending institution, which makes more money on interest rates by the end of the loan term, Hyde said.
For dealers, though, a payment delay “makes sense close to the holiday,” said Steve Cook, of Cook Chevrolet-Buick in Vassar, Mich. Dealers can make a sales argument, telling the customer, “If you take delivery now, you can enjoy your car with a delayed payment,” he said.
Customers don’t accept the offer as much as they did a few years ago, he said. But when they do sign on for a payment holiday, dealers should be transparent. The dealer should tell consumers that the amount of interest will be higher and that they will eventually make the payment at the end of the loan term, he said.