Updated: Apr 10
The headlines about being payment-free for 90 days are dangerous because they don't give the whole story. For those who need the relief please contact your lender but do so knowing they don't really have your best interest at heart (that's your job!).
For those who could pay but would just rather not due to all the uncertainty this is really who this article is for. It’s important for people to realize that there are consequences to decisions even if they look advantageous upfront. Lenders want to make money; they just haven't decided how much...YET.
Many people have lost income, jobs, business opportunities, and childcare. It is stressful! Yet, bills are still due and lenders want their money.
I want to talk about what to ask your lenders. BEFORE accepting payment options like:
Deferment - The deferment period is a time during which a borrower does not have to pay interest or repay the principal on a loan. (Example: your student loans are deferred while you are still in school)
Forbearance - a temporary postponement of payments. It is a form of repayment relief granted by the lender in which terms are negotiated between the borrower and the lender. The borrower must demonstrate the cause for repayment postponement, such as financial difficulties associated with a major illness or the loss of a job. (Payments may be postponed but interest is still accruing so this is a more expensive option than a deferment).
Grace period - A grace period is a period of time, usually about 10 days or more, during which a past due amount can be paid with little or no penalty.
My advice: ask what happens after the grace periods are over...
Call your bank or lender and ask them what your options are if you can't pay. Most have been suggesting applying for 90-day grace period, but the key here is to ask for the terms and conditions in writing before you agree to the relief option they suggest.
Tip: Ignorance of the law i.e. not knowing what you signed up for is not a valid excuse. You will be held to what you agreed to. Lenders usually send terms and conditions after you agree to the program to make sure you know what you agreed to. You have to read the terms (very few people do). 90 days grace period sounds good because it could mean no interest, fees, or negative credit reporting.
Here's what else it could really mean:
The payments get added to the end of the loan (extending loan). Example: Instead of a 24-month loan, you now have 27 months. The longer the term the more likely you could end up upside down or underwater on the loan, meaning you owe more than the item is worth.
The amount missed gets added to the balance and is capitalized. What does capitalized mean? The short answer: you will owe more money. Example: if you owed $500 (principal) and the interest (20%) is $100. Making a payment of $400 usually pays the $100 interest first then $300 goes to the principal (YOU NOW OWE $200 principal). If they capitalize the interest, $500 of principal becomes $600 (UNPAID interest $100 + principal $500) then you add interest (20%) to the new principal balance. So same facts with capitalized interest: $600 principal and the interest is $120 (interest is higher due to the higher CAPITALIZED principal balance). You make a payment of $400, pays the $120 interest first then $280 goes to the principal BUT you now owe $320 (principal).
You will have to make a lumpsum payment or be forced to do a loan modification. Modifications will affect your credit and essentially you are being forced into a new loan that might not have the great terms. If you were asking for the payment relief, I’m assuming you weren’t able to cover the original payments so why would you be able to come up with four payments in 90 days? Often times the lender wants all of the missed payments at the end of the grace period plus the payment that gets you back on schedule. If you are unable to pay the lender the lump sum, they could decide that you have breached the terms of your loan and require that you refinance the loan. If you have good credit you might get a better interest rate than you had but refinancing/loan modifications cost money and believe me YOU are paying those costs in the long run.
If the lender "forgives/waives/cancels" the payments you will end up fighting with the IRS because THE IRS WILL CONSIDER the loan cancellation/forgiveness INCOME TO YOU AND TAX IT. (It's no longer a loan, it’s a cash gift.)
Hopefully you aren’t overwhelmed. I just covered ALOT!
If you need the payment relief, work with your lender and understand what you are asking for because this is not a free pass.
If there is something you don't understand, leave a message below. 👇🏾👇🏾 I offer financial planning which means I'm there sitting with you thinking through scenarios like this and strategizing. Visit www.onmyownfinancial.com to find out more.
Which loan relief option are you considering? Share with me in the comment section below.⠀⠀⠀