Wednesday, May 30, 2007

Financial Freedom Vs. Skip-A-Payment

We taught our kids to avoid debt whenever possible, and that if they have to borrow money, to pay it back as soon as possible.

Dd23 has done very well with this. She uses a credit card but pays it off every month; she paid cash for her first car. A few years ago, her car reached the point of near-death, so she replaced it with a newer model, but she had to take out a car loan to do so.

At her age, this is a smart thing to do. She needs to establish credit so she can get a mortgage (one of her primary goals is to buy a house in the next few years), and her prompt payments on her car loan will help her do so. In addition, she has been paying extra each month so she can pay off the car early. Very smart.

However, the bank that loaned her the money is doing its best to distract her. Every so often they send her a letter like this one:

As our valued customer, you can make your summer sizzle with a little extra cash! Because of your timely loan payments to XXX Bank, we're giving you the opportunity to skip your next loan payment!

Here's all you do. To skip your next loan payment, simply sign the attached Skip-A-Payment certificate and return it, along with a $27.75 processing fee, in the enclosed envelope before your regular payment due date. Please place your payment coupon for the month you are skipping in the back of your loan payment book and make that payment at the end of your loan term.

It's that easy! The hardest part may be deciding how to spend your "extra" cash! But whether it's for vacation traveling or something special for you, your good payment habits have earned it. We appreciate your business and the banking relationship we have with you....this offer expires July 30, 2007!

Now, let's think about this for a moment. If you take them up on their little "reward," you are actually extending the time you are in debt. Since that is not dd23's goal, she ignores these offers. But how many people do fall for this offer and thus extend their loan time*? Probably lots of people.

The longer it takes to pay off debt, the longer it will be before a person can reach financial freedom. The bank is not doing its customers any favors with an offer like this. In the expanded second edition of my book Life Prep for Homeschooled Teenagers, there is a new feature called "The Financial Freedom Project." The concept of financial freedom is something you must help your teens understand if you want them to grow up to be debt-free adults.

(For a free downloadable project from the book, click here.)

*In the fine print, the offer notes that the loan time will be extended, and that "interest will continue to accrue on the outstanding principal, including the principal being deferred." How nice for the bank.


Janet said...

Our homeschooling group has this great guy who is a financial advisor (Christian) who offers classes to high school classes. I WILL BE SENDING MY KIDS!

I really hate it when they keep sending me credit cards or the banks keep calling to extend our credit limit. ARG!

TurtleMom said...

Although my children are only 9 and 5, I fully plan on teaching them financial matters based on the mistakes their father and I have made in the past. I figure it's a lot easier to walk through life if you don't have to spend time digging yourself out of a hole you've put yourself in! Our parents (my husband's and my) never taught us financial planning so every thing we've learned, we've learned through trial and error. We want to save our children from that struggle.

Barbara Frank said...

Hey Janet, my pet peeve is when they send me those stupid credit card checks. I'm so afraid someone will steal them from my mailbox.

Turtlemom, sounds like your kids will learn from your experience; it will mean more because you will know what you're talking about!

Sherry said...

I hate those dratted c.c. checks, too.

It's important to actually teach financial skills and not just expect them to be absorbed, like my parents did.