‘Skip a Payment’ Scam – Banks Offer Expensive ‘Gift’ During Holiday Season

Posted by on Dec 1, 2006 in Articles

‘Skip a Payment’ Scam – Banks Offer Expensive ‘Gift’ During Holiday Season

Note: This article was originally posted in 2006 but we brought it to the front page again in 2010 because this scam keeps turning up every year.

During the holiday season, many banks invite borrowers to “skip” a car payment as a “gift” to help customers stretch their holiday dollar.

Unfortunately, this “gift” is only a gift for bankers. It increases the bank’s profit at the borrower’s expense.

In fact, if you express this “gift” in terms of APR, it may end up costing more than a payday loan…

In November, Volkswagen Credit sent a letter to some of their customers entitled “Why Not Skip a Payment This Holiday Season?” with the following offer:

The holidays… time to give thanks, spread joy and shop for the best sales. Now, here’s the perfect “gift” to help you stretch your holiday dollar. Volkswagen Credit is offering you the opportunity to ‘skip’ your December 2006 payment on your current account listed above.

They say that they will “assess your account a $25.00 extension fee” and the details on the back of the letter state:

Finance charges will continue to accrue on the unpaid balance as specified on your contract, including the month you skipped your payment. (emphasis mine)

Now we see why the word “skip” was in quotation marks – it is not a skip at all but an extension of your loan. If your monthly payment is $200 and interest works out to $67, then the extension alone costs you $67 in additional interest for the month of December.

To add insult to injury, they charge you $25 to give them an extra $67!

Now we see why the word “gift” was in quotation marks as well…

The letter ends with:

“Happy Holidays!”

Happy Holidays indeed! For bankers, maybe, but not for consumers.

How much does this “loan” cost in terms of APR?

Loan Amount: $200 (the amount of the monthly car loan payment)
Total Fee: $92 ($67 in interest plus $25 extension fee)
Number of Days: 30 days (one month)

Let’s plug these values into the Payday Loan Calculator. (External Link)

The APR for this “gift” loan is almost 560% APR.

How does this compare with licensed payday lenders? How about illegal loan sharks?

Most payday lenders charge between 391% – 782% APR (of course APR may exceed 1,500% on loans of extremely short duration). Illegal loan sharks usually charge 152% APR and rarely exceed 250% APR. For more information on payday lenders and loan sharks, please read Sixteen Differences Between Payday Lenders and Loan Sharks.

In terms of APR, this “gift” from banks is twice as expensive as illegal loan sharks and on par with many payday lenders.

Ethically speaking, however, I think that this morally bankrupt offer is much worse because they use the words “skip” and “gift” when neither truly apply.

With the “skip a payment” scam, it looks like banks have found an underhanded way to give themselves another gift during the holiday season.

Sources:
Holiday Season: Banks Offering “Skip a Payment” (SFGate)
Volkswagen: “Why Not Skip A Payment?” (The Consumerist)
Letter from Volkswagen Credit made public by Mr. Ramit Sethi.

Related Post: Bounced Check Protection (another area where a “service” from a bank ends up costing more than a payday loan)

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