The Covid-19 pandemic crept up on the world out of nowhere and in a very short time, it has taken a huge financial on millions of consumers around the world. In Canada, many banks set up loan deferral programs to temporarily help business owners and individuals make it through the crisis without losing their property or assets. Unfortunately, too many Canadians didn’t fully understand what a loan deferral was or what the consequences of loan deferrals can be. Read on to find out more about what loan deferrals are, the consequences of loan deferrals, and how to deal with them.
What is a Loan Deferral?
A loan deferral is when the bank allows customers to skip payments on their mortgages, credit cards, lines of credit, or other loan products due to widespread job loss. Many Canadians were left unexpectedly jobless and the banks estimat this could lead to huge losses if millions of citizens suddenly started defaulting on their loans. Instead, banks and creditors did allow those who needed it, the chance to skip a few payments until they were able to get government aid or a new job.
Essentially, this means you can defer your payments without a penalty for a late or missed payment. No extra fees would be added to defer payments and it would have no negative impact on your credit rating either. For millions of Canadians, loan deferrals seemed like the perfect option to help them make it through these troublesome times.
Loan Deferrals Are Not Debt Forgiveness
In a heat of panic, many Canadians who had lost their jobs jumped on the bandwagon and accepted loan deferrals from their banks. However, many consumers believe this was a debt relief program – which is most definitely is not. Debt forgiveness programs allow you to reduce your debt to make it easier for you to pay. Unfortunately, loan deferrals simply postpone payments while continuing to add interest, increasing your capital. This is very different from reducing your debt. In fact, it’s the very opposite. This unexpected turn of events has been a huge source of stress on millions of Canadian families who were misinform about what loan deferrals are and what the loan deferral consequences would be in the long-term.
Loan Deferrals Must Be Agree Upon
Not all banking institutions and credit card companies automatically offered loan deferrals to their customers. If you wanted a loan deferral, you would have had to call your creditor and settle on terms, including how many payments would be deferred. Then the creditor would have had to agree before you could skip a payment. Unfortunately, many consumers were unaware of this and simply stopped making payments. This leads to a few obvious consequences: accounts being disable and a huge impact to your credit rating – making it nearly impossible to secure a loan from a traditional banking institution in the future.
Loan Deferrals Are Not Recommended on Low-Interest Loans
Loan deferral programs offered by your banking institution base the financial impact of your loan deferrals on three things: your interest rate, your balance, and the remaining term. If your interest rate is low, you could be setting yourself up for owing even more money at the end of the loan deferral term than you are expecting.
Loan Deferral Consequences
Though loan deferrals sound helpful, they actually have a huge downside that far too many consumers didn’t fully understand. While excess fees would not be tagged on to your accounts, interest still continued to accumulate day after day, increasing the total debt while payments were paused. Depending on how much the capital of your loan is, the extra interest accrued can have a tremendous impact on your finances. It can mean an increase in your minimum payment, which was a scary discovery for many.
Other loan deferral consequences include interest accrued on credit cards. As you probably already know, credit card companies charge a ton of interest. Deferring payments for six to 12 months could have a massive impact on your total debt. For many people, the total to repay may now become unpayable. The debt will increase so much that it is nearly impossible to pay off – leaving you even more stuck in the cycle of debt than you were before the pandemic hit.
Loan Deferral Consequences to Your Credit
Loan deferrals do not affect your credit rating in the way you may think, but indirectly, they do still have an impact. If you and your lender have agreed on terms for skipping payments, those missed payments will not have an impact, as most financial institutions explained. However, there is an indirect way loan deferrals affect credit.
Credit ratings are affected by a few things including paying on time. They are also affected by the amount of credit you’re using and the size of your debt. Deferring loan payments increases the total amount owed with the interest charges continuing to accumulate. This can have an impact on your credit history and your credit score, particularly if you were already close to your borrowing capacity prior to the pandemic.
Secured debts, like mortgages, may not have the same impact. But unsecured debts, like credit card debts, that are deferred will certainly affect your credit in a negative way. Holding a high amount of credit, especially if it exceeds 80% of the credit card limit, has an impact. Loan deferral consequences can vary but this unexpected effect on credit is an important one.
What Happens at the End of the Loan Deferral Period?
Once the agreed-upon loan deferral period is over, you will start assuming your payments regularly again. However, your payments may have changed. Because your principal amount has grown over time, the payment amount and loan terms may have to change. If your amount is too high, you may find yourself unable to make the new, higher payments. Because the loan deferral period has ended, you do not have the right to skip payments anymore unless the creditor has agreed to extend your loan deferral period.
Beware when extending your loan deferral period. Even if your financial institution is willing to extend the loan deferral period for you dur to extenuating circumstances, your principal amount will simply continue to grow with the interest being continually added and nothing ever being paid down. It may seem like a good option if you’re in a bind, but you must be aware of the long-term consequences before you agree to extend your loan deferral period. Otherwise, you may end up with a loan that is simply too high for you to afford.
What Happens with a Credit Card Loan Deferral?
If you took a loan deferral for your credit card payments, then you may find yourself in even more hot water than with a mortgage deferral. At the moment, mortgages have a relatively low interest rate, but the same can’t be said for credit cards. In fact, if there’s one thing you can count on in good times or in bad is a high credit card interest rate. Credit cards are not the best place to borrow from. Deferring your payments are an interest rate of 18% to 20% means you will owe significantly more than you started with several months down the line.
If you have deferred payments on your credit card, the best thing you can do at the end of the loan deferral period is borrow money in the form of a personal loan and pay off the credit card company. In fact, anytime you owe money on your credit card that you cannot afford to pay you should consider a personal loan to cover it. This will lower your overall interest rate, help you save money, and get you debt-free faster.
What Happens if My Loan is Too Big After Loan Deferral?
If you think you can just rearrange your terms, you should be aware that this isn’t always possible with large financial institutions. Big banks are not exactly known for the flexible repayment schedule. If the proposed payments are too high for your current to support reasonably, you are very likely to end up going into even more debt just trying to keep your head above water.
This can affect your credit score and make it very difficult for you to secure any other loans should you need a helping hand after the pandemic is over and you’re finally working again. Ignoring your debt is also not a viable option. This will damage your credit and put you in collections. At that point, you will either have to borrow again to get out debt or face insolvency – which is not a road you really want to go down unless you are unable to find any other options.
How to Manage the Consequences of Loan Deferrals
If you are one of the millions of Canadians who opt for loan deferral programs as a Band-Aid solution to your job loss, the first thing to know is that you are not alone. The next thing you need to know is that you do have some options as you work to get yourself back on your feet. Here are some ideas:
Take Out a Personal Loan
Paying off one debt with another? That may sound a little odd but there is one thing BHM Financial can offer that your bank can’t: a flexible repayment plan. We can loan you the funds you need to either pay off your loan to the bank. Then you can pay us back with a loan repayment plan that works with your income and your lifestyle. We don’t expect you to stop eating or buying clothes for your children to pay your debt back. We know you need flexibility in terms of the timeline and the payment amount.
Our expert financial consultant can work with you to help you find a way to pay off your debts, live your life, and get yourself on the path to financial freedom today! If you are unable to secure a personal loan anywhere else, no need to work. BHM Financial offers bad credit personal loans so even if your credit score is not great, we can help you. We base our decision to lend you money on your income, not your past. Especially this year, we know the past may not have been your fault and you are trying to do everything you can to get yourself back on track.
Take Out a Home Equity Loan
Your home has value and it’s literally just sitting there. Instead of letting all of your post-pandemic bills get the best of you as you catch up on your extra loan deferral interest fees, leverage the value you have to make your life simpler and less stressful. You can also borrow against a paid vehicle, RV, mobile home, boat, truck, or trailer. If you own value, you can use that value to get you the cash you need to get creditors off your back. Then you’ll only need to pay us back and as mentioned above, we work with you to make your repayment plan feasible for your lifestyle.
Meet with a Financial Advisor Sooner Rather than Later
If you can, meet with a financial advisor before your loan deferral period comes to an end – or as soon thereafter as you can. Don’t wait for your debts to pile up. Take a proactive approach and meet with one of our BHM Financial experts today to find out what you can do to minimize the impact of the loan deferral program you accepted. Our goal is to help you make it through this difficult time without adding extra stress to your plate. Plus, our financial experts can also sit down with you and help you plan out a budget that works. So not only will you be paying off your debt, but you’ll also be on your way to planning a financially secure future.
How Do I Protect Myself from Needing Financial Help Again?
If this pandemic has done anything, it’s teach us that saving for a rainy day is not just a good idea – it’s crucial! It’s always better to have money saved and not use it than to need it and not have it. The economic impact of the Covid-19 pandemic has been enormous and unfortunately, the average consumers are the ones who have the paid the price most. A contingency fund that can cover anywhere from six to 12 months of daily expenses is crucial to surviving an economic catastrophe.
Here are some tips to staying debt-free in spite of a major economic crisis:
- Build up and save a contingency fund with enough to cover six to 12 months of expenses
- Avoid using credit cards as a means of advancing you money
- Try to live within or below your means – never above
- Create a budget and then stick to it
- Keep your home-related costs (from mortgage to maintenance) at no more than 20% of your gross income
- Invest whatever money you have in areas that have high return, like real estate, so you have something to fall back on in the event of an emergency
- Pay your bills on time and if you can’t, seek financial advice sooner rather than later
- If you don’t know how to organize your expenses and your budget, ask a professional for help before you get saddled with overwhelming debt
How Can BHM Financial Help Me More than a Bank?
As we all already know, a bank isn’t your friend. They lend you money under the assumption they will get it back with interest. If you find yourself unable to make your payments, your bank will not work with you to help you get back on your feet. They will simply seize and sell as needed to recoup their missing funds. If you’ve had a stroke of bad luck – otherwise known as 2020! – then you need a break. However, the bank isn’t ready to give it to you. If your credit has suffered or your debt load has increased, you’re basically out of options there.
At BHM Financial, we offer bad credit loans to our clients. So when you think you have zero options left, you still actually have one more! As a direct lender, we don’t need authorization from anyone to lend you money. We review and approve all of your client’s loans ourselves. This gives us the opportunity to approve loans very quickly and get the cash in your hands right away – in as little as one business day, actually!
Then our expert staff will work together with you to ensure you get the funds you need and a flexible repayment plan that works for you. This will help you to make your payments on time and help you rebuild your credit. Plus, it will get rid of some of the undue stress caused by the debt hanging over your head. Call us today and see how our expert loan consultants can help you find the solution you need to make your debt a thing of the past!