Accelerated Payment Programs
Accelerated payment programs are based on excellent ideas and, under some circumstances, can provide borrowers with great benefits including thousands of dollars in interest. However, some programs are very costly. If you can muster up the self discipline, you can design your own program and save the fees you’d pay signing up for a formal accelerated payment program.
The programs we have seen use one or more of three primary acceleration methods (some companies claim more, but nearly always use combinations of these three):
1. Pay off your debt with the highest rate first (usually credit cards). Use either available monthly income or refinance (this may incur additional fees, but could be well worth the trouble). Note: Whether you are enrolled in a formal program or directing your own, you must avoid adding new debt in order to make it work as planned.
2. As each of your higher rate debts are paid off, apply the money that was being used to make those payments to the next highest rate debt until all your loans are paid off.
3. Bi-weekly payments. If you get paid every other week, you may take advantage of the fact that the bi-weekly payment programs result in two extra paydays each year. If you pay ½ of your payment amount every other week, you end up making the equivalent of an extra payment each year. Depending on the arrangements made with your lenders, you may also be able to save some interest (usually insignificant amounts).
Before signing up to have someone administer your accelerated payment program carefully consider:
1. How much will their service cost? Some sales people are very skilled at avoiding answering this question. Some answer by saying, “the cost comes out of the money you save.” Although such a statement might be technically accurate under certain circumstances, there are still costs you pay to them. Know what those costs are before you decide. Most of the companies trying to sign you up for such a program charge a monthly service fee and an initial setup fee.
2. If they charge an initial setup fee find out if any of it is refundable should you decide to withdraw from the program, sell, or refinance your home. Calculate your monthly cost and decide if their service is worth that much to you. For instance, some companies have charged a $3,000 setup fee plus a $15 monthly service fee. Such a loan, with an anticipated accelerated payoff of eight years, would result in a monthly cost of:
$3,000 ¸ 8 ¸ 12 months = $31.25 + $15.00 = $46.25 per month
The cost may be well worth the benefit if you don’t want to administer your own program, and if you stay with their program to get out of debt in eight years. But, suppose you decide to withdraw from the program in two years (dissatisfied with the service or for whatever reason):
$3,000 ¸ 2 ¸ 12 months = $125.00 + $15.00 = $140.00 per month
If you leave such a program this early your savings (in the form of unpaid interest) will likely not cover your costs.
If you are considering such a program we encourage you to carefully consider your options. Some companies offer similar programs at substantially lower fees than those shown above (around $12 per month with much lower setup fees). If you have the willpower, you can pay yourself to accomplish the same thing. You can apply the extra ($15, $46.25, or $140 in the case above) to further accelerate your payoffs or pay yourself each month.
Another concern: Many of the programs include automatic withdrawals from your checking account. Those drafts may include your monthly payments owed to other lenders. Do you really want a company which you know very little about, and which may be unregulated, drawing money from your checking account? What is to protect you from such a company using your money for other purposes? We are aware of two examples where just such a situation occurred. After making the payments to the accelerated payment company the customers received delinquent notices. After the company went out of business it was learned that the money the consumers had paid, had been diverted for other purposes and the customers ended up making two months’ payments twice (once to the servicer and again directly to their creditors).
Those who benefit most from accelerated payment programs are people who have significant amounts of credit card or other high cost debt. Someone who merely has a first mortgage at a competitive rate is generally much better off just increasing his/her monthly principal payment.