I logged in to pay my monthly car payment and received a strange notification. I could now skip my car payment for a $25 fee.
The implications of this type of program are far-reaching. In essence, it’s a payday loan. Keep in mind that this came from a Federal Credit Union—the supposed good guys.
The sneaky lenders. I wrote an article about some shady dealings I had with credit card companies recently (“Credit Card Users Beware”).
While this one isn’t shady, it is sneaky. While postponing your auto loan won’t change your loan stats, it will change your APR.
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Your Annual Percentage Rate is different from your interest rate. Your APR is your interest rate plus any fees you incur.
If you assess $100 in skipped auto payments, your APR will shoot through the roof. However, this is a license to print money for lenders.
The facts of auto loans. I am not a huge fan of car payments. I only bought this car because the Marine Corps stationed me in San Diego. I wanted to ensure my wife had two cars in Florida.
I don’t think lenders will let you skip car payments indefinitely because the value of your car will continue to drop over time.
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Cars are depreciating assets for most of us. The underlying value of the vehicle and the car loan must stay somewhat close in case the lender needs to repossess.
What about student loans? This brings up a more realistic scenario regarding student loans. Student loan payments will return this summer of 2023 (perhaps), and I can ensure your lenders plan to implement this skipping mechanism.
Student loans are different from auto loans because they are unsecured, meaning they are not attached to physical assets.
With no depreciating asset in sight, lenders can allow you to skip unlimited student loans. If you are struggling financially, you need to avoid this at all costs.
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What about skipping mortgage payments? I don’t believe mortgage payments will get out of control. If the bank owns your loan, I see them allowing you to skip a few payments.
However, if the bank sold your mortgage to investors (as part of a mortgage-backed security), your ability to skip will be limited. Investors, including me, love to receive monthly interest payments from MBS.
A better way to pay bills. I love paying bills every month because I understand finances. You need to have a significant difference between your income and your expenses. We call this difference cash flow.
You have a cash flow problem if you are considering skipping your auto or student loan. The pain usually starts with housing costs.
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The best plan is to keep housing (including utilities) under 30% of your income. Does this sound impossible?
If so, you are probably trying to do everything independently, which is what they want. There are many ways to reduce your housing costs.
You can become a roommate, get roommates, move in with your family, have your family move in with you, downgrade your house, or move to a small city.
The power of being different. I know everyone believes they deserve to have their own space, but sadly, this is not the case.
Living alone will be a thing for the truly wealthy. If your parents bought a home, you’d need to piggyback on this purchase by working with them to get yourself ahead financially.
My wife and I have had roommates for four years. While not ideal from a privacy standpoint, financially, it is incredible.
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Our parents did not set us up financially, so we had to take matters into our own hands. We can retire under the age of 43 because of those roommates. Now, it’s time to start building our kids’ futures brighter than ours.
Build a tribe. A tribe is a group connected to a leader and an idea. The more we try to do things alone, the more little stuff like skipping payments will become the norm.
The book “Find Your People” says the “independence” movement comes from the devil. I agree; humans must interact with one another.
It’s much easier to attack a lion cub when it’s away from its tribe. Taking down a lion’s den is much more challenging as an individual.
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I may be overreacting to this whole skipping payment charade, but I have seen this play out before.
When you become a landlord, you see many new adventures through your tenants’ lives. We had a tenant who was constantly borrowing her next paycheck from her current paycheck.
Getting behind. Essentially, she was $300 behind and couldn’t dig herself out of the hole. It was worse than living paycheck to paycheck.
It is the same with people who use payday loans at 50% interest. The issue is that they don’t solve the underlying problem.
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If you are reading this, then you have the mental aptitude to succeed in this life. However, don’t fall for a wolf in sheep’s clothing.
Banks only do things that make them extreme profits. The return on letting you skip one payment is infinite. This means they are printing money, and you are the ink.
I understand what it’s like to have a cash flow problem. I have a wife and two kids; trust me. However, I solved the problem: my lack of financial education.
Take the time to follow the money and find the problem; it’s better than paying $25. An excellent place to start is the 50/30/20 budget.
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The best budget. The 50/30/20 budget says that 50% of your income is for needs, 30% is for wants, and 20% for saving.
You can go in-depth, but you quickly do the math. For example, we will retire with over $11,000/month in passive income.
My mortgage is $1,800, which is 16% of my income. Our total expenses, including food, are roughly $5,000 per month. This put us squarely in the 50% range.
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Conclusion. I understand that hitting these numbers is tough, but that’s life, right? I lived overseas for a significant amount of my life—over 12 years.
Most people overseas (I lived in Africa, Central Asia, Scandinavia, and Japan) do not have detached homes with yards and big cars.
If they live alone, they have a small studio apartment in a high-rise building. The American dream requires extreme sacrifice and dedication.
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The American Dream costs $5 million (and more with inflation). Buying a home, saving for retirement, and putting your kids through college in one lifetime are simply out of reach.
The more we try to live the dream, the more vulnerable we become to predatory lending tactics like skipping auto payments.
Be careful out there because it’s going to get worse. We already have “pay later” payment plans, skipping car payments, and student loan forgiveness on our plates. More badness is coming, so we must figure out our finances quickly. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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