Beware Deferment Ploys

How many of you pay extra on your home or car payments? There is a little trick you can do to make your principal go down, pay every two weeks. You will need to check with your loan company and make sure they do not penalize you for this (if they do, consider refinancing with another company, its your loan, pay it when you want and how much you want).  If you are paid on a bi-weekly basis, you can pay half your payment every two weeks. Because you will get paid two to three extra paychecks a year, you will get ahead on your payments. Your interest rate will go down and, if you are in a crunch, you can pay a little less for one month. But because these companies make their profit off your interest rate, they will try a scheme to get you back on track, the deferment plan.

A deferment plan is when you can skip a payment for one month. The catch is, they don’t skip the payment, they just tack it on to the end of your account, so it’s just like pushing it back. They do this also because they don’t want you paying extra. If it saves you money, it costs them money. Instead, if you are low and your payment allows you, only pay a portion of what is due. This may sound confusing.

Right now, my car payment is $324 dollars a month. (I know, that’s high!) I pay $200 every 2 weeks, which means I am paying $400 a month. Which means my interest rate is covered, and my principal is going down fast. (This still works if I split my required payment in half and did not pay the extra $76 dollars a month.) Because of the extra payments, the loan company’s computer calculates my next payment due three months from now to get me back on track with their original pay schedule. Because of this, they keep sending me deferral notices so that I don’t pay for a month and I get closer to their pay schedule and they can still get the interest payment that will accrue because my principal payment will remain the same instead of going down. If I am a little short on money, I can afford to pay $100 every 2 weeks for a month. That will leave me $200 that month to use. I am still paying on the principal on my loan, just not as much as I usually do. But because I am so far ahead, it doesn’t hurt me in the long run. This isn’t something I could continue to do, but if I was in a crunch, it is manageable. Also, if something really bad happened, I could not pay until the next due date, three months from now. I would get to defer my payments, without them reaping any benefits.

If I continue to pay like I do, and I do not get into a crunch (because I have budgeted and because I have an emergency fund), I can pay my car off a year earlier than scheduled, and save myself hundreds to thousands in interest. This can work the same way with your mortgage.

No matter your situation, whether you are in a money crunch, or whether you are smooth sailing, it is always best to avoid deferments. It looks better on your credit, and you will be done with your debt sooner without them. With extra payments, you allow yourself the buffer you may need without hurting your credit.