Skip-a-Payment

Around this time of year, banks and credit unions will sometimes offer borrowers the option to skip a payment or two in return for a fee. This offering is a spreadsheet that calculates the APR on a loan after the borrower accepts the offer to skip one or more payments. There are two amortization schedules on the sheet. The first is for simple interest and the second amortization is for compound interest. The input cells are yellow as usual. When you enter the number of payments to skip, both amortization schedules will automatically skip that many payments. Also, the data is entered only once in the yellow cells. Both simple and compound schedules will be updated. The fees that you entered are automatically added to the remaining principal balances for both schedules.

The title over the simple interest analysis is “Quasi Simple Interest”. I called it that because the amortization schedule is not a true simple interest calculation because I don’t use dates for actual day’s interest. It was easier to adapt a compound interest table, and set aside the interest for the skipped payments so it would not compound. Then when payments resumed, the amounts were applied first to the accrued interest and then, after all interest is paid, to principal. I tested the results against a real simple interest calculation and it was very close.

Actually, for one or two skipped payments, the APR for simple interest and compound interest was very close. The only difference (see the comparison on the sheet) was that a small amount of interest is lost to not compounding the simple interest, and the number of payments can be different. Interest for simple interest loans accumulates and is due on the maturity date. Compound interest adds additional payment periods.

Consumer protection sites warn borrowers against using “skip-a-payment” because the fees will increase the actual APR rate they are paying on the loan. A $25 fee may not change the APR much on a 30-year mortgage, but as a car loan gets down to a couple of years to maturity, $50 for two skipped payments can add 40 to 50 basis points to the remaining loan.

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