What Are The Consequences of Loan Deferrals When the Deferral Period Ends?
The COVID-19 pandemic has posed significant financial challenges to many Canadians, leading to a substantial number of people opting for loan deferment. However, while loan deferment may provide short-term relief, it’s critical to understand the potential long-term implications on your finances. Let’s delve into the ins and outs of dealing with the consequences of loan deferrals when the deferral period ends.
Understanding Loan Deferment
Loan deferment allows borrowers to temporarily suspend their loan payments for a specified period, which could span from a month to six months. During this period, the interest on the principal amount continues to accrue. The skipped principal amounts will have to be compensated for in the future.
Essentially, loan deferment is a short-term solution to financial distress, providing temporary relief to your budget. However, it’s crucial to remember that deferment is not synonymous with debt forgiveness. The loan amount, along with the deferred payments, still need to be paid.
The Aftermath of Loan Deferment
When the deferment period ends, you will have to start paying your loans again, including the deferred amount. Here’s what it means for different types of loans:
Mortgage Payments
Deferring mortgage payments can result in increased future financial costs due to the continuous accrual of interest during the deferment period. This unpaid interest gets added to the principal balance. Therefore, it’s important to formulate a repayment plan before the deferment period ends. Options include paying the accrued interest once payments resume or adding the unpaid interest to your loan or mortgage balance. However, both options will result in increased future interest costs and monthly mortgage payments.
Credit Card Payments
Deferral of credit card payments poses a more significant concern. While some banks may reimburse a portion of the interest charged or reduce the interest rate during the relief period, the accrued interest will still result in higher balances and minimum payments once the deferment ends. It’s essential to assess your repayment capacity and formulate a plan accordingly.
Auto Loans
For auto loans, lenders usually extend the term of your loan for the number of months deferred. This results in a higher loan balance for a longer duration, leading to increased interest. Your auto lender may increase your monthly car loan payment to account for this interest or add it as an additional payment at the end of your car loan.
Student Loans
The federal and Ontario government announced a temporary and automatic deferment of student loan payments from March 30, 2020, to September 30, 2020. Although there’s no added monetary cost to deferring a government student loan, the deferment extends the length of time you have student debt.
Tax Obligations – A Hidden Deferral
If you are collecting the Canadian Emergency Benefit (CERB) or the Canada Emergency Student Benefit (CESB), remember that these payments are considered taxable income. Therefore, you may have to deal with tax obligations when the time comes to file your tax return.
Impact on Credit Reporting
While loan deferments due to COVID-19 will not show up as missed payments on your credit report, there can be long-term implications. Higher debt balances post deferment can negatively impact your credit score, and future lenders may view this deferment as an indication of financial distress.
Dealing with Deferred Payments Post-Deferral Period
Dealing with deferred payments post-deferral period requires a strategic approach. Here are some tips:
- Develop a realistic budget based on your future income.
- Focus on paying off your highest cost debt first.
- Continue with your frugal spending habits until you pay off your COVID-related debt.
- Make additional lump sum payments whenever possible.
- If you can’t afford to resume payments, contact your lender right away and discuss options like refinancing or an extended deferral.
- If your deferred debt seems insurmountable, consider consulting a Licensed Insolvency Trustee to help you negotiate a deal with your creditors.
These uncertain financial times have led to a surge in loan deferments. While most Canadians will recover, if you’re struggling, don’t hesitate to seek help.
