Deferring Loan Payments During Coronavirus
, by Tom Quinn
As the financial impacts of the coronavirus pandemic begin to be felt by more Americans, a lot of people are starting to worry about how they'll pay their bills on time.
If you happen to be in this situation, the best course of action is to contact your lenders as soon as possible (preferably before missing any payments) to explain your situation and seek assistance. The good news is that most lenders have programs in place to help their impacted customers. You may have heard or read about loan forbearance, deferred payment plan, suspended payment, grace period and similar programs.
But what do these terms mean and how do they work?
With loan forbearance, the lender permits the borrower to pay either a reduced payment or no payment for a temporary short-term period. With a deferred payment plan, the lender temporarily suspends your payments for a period of time. Neither of these are intended to be "freebies" - you'll likely be expected to pay the amounts owed after the forbearance or deferred payment plan ends. One key difference is with deferred payment plans interest does not accrue for subsidized federal loans (student loans as the most common example). Interest likely accrues with other loan types in a deferred payment plan and with forbearance.
Each lender also determines how any associated fees, interest accrual and grace periods (a grace period is a set length of time after the due date during which payment may be made without penalty) will be treated.
At the end of the temporary program, you will be expected to pay back the postponed payments. There are several payment approaches, such as via a lump sum in full by a certain date or the lender may extend the end of the loan term by "x" months or they may require larger monthly payments over a short time period to pay off the overdue amount.
The terms of the forbearance or deferred payment plan program will likely vary by lender so be sure to ask questions to make sure you know exactly what you are signing up for, such as:
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Can I postpone the monthly payment amount in full or how much can I reduce my payment amount?
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For how many months?
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If for a mortgage loan where the servicer also manages the payment of your property taxes/insurance, how are those payments impacted by the program (if at all)?
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What will I be expected to pay at the end of the program? A lump sum, a higher monthly amount?
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Will any fees (late fees for example) be incurred in this program?
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How will this be reported to the credit reporting agencies? Will the account status be reported as "current" (i.e. paid as agreed)?
Card issuers are also encouraging their customers affected by the coronavirus to reach out if they are having financial problems.
Some examples of the additional relief options being offered:
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The waiving of late fees or returned check fees
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The waiving of or reduction of interest charges for a set period of time
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A temporary increase on credit card limits
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Reduced minimum payment amount
Note, the reporting of an account being in forbearance or a deferred payment plan is not alone considered negative by the FICO® Scores. However, the information your lender will likely continue to regularly update on the account while in forbearance, such as current balance and payment status, will continue to be considered in a FICO® Score calculation. As such, you will want to also check with your lender on how they intend to report this information while the account is in this deferred status.
Be wary of potential scams where fraudsters, acting as a reputable lender, contact you regarding your financial status. Never share confidential information such as your name, password, SSN, PIN or other account information in this case. Hang up and contact the lender yourself to ensure you are interacting directly with your lender.
Whatever it is called - forbearance, deferment, loan payment suspension or postponement - make sure you pay as agreed until the relief program has been officially approved by your lender. Note, these arrangements are temporary and you will likely need to reapply if you want to extend the program.
Tom Quinn is the Vice President of Business Development for myFICO and has over 25 years of experience working with consumers, regulators, and lenders regarding credit related questions and initiatives.