Help Now, Hurt Later? Considering Immediate Relief vs. Long-Term Financial Impact of Accepting Assistance from Creditors
Millions wonder how they will meet the coming month’s financial obligations due to how this pandemic has changed day to day life. The magnitude and spread of Covid-19 led both state and federal governments to offer relief through legislative measures, court decisions, and executive orders to tackle the developing crisis.
Each measure seeks to address the immediate need for payment relief. But what happens when the assistance ends. Will consumers face a worse financial position when the bills once again come due?
Consider both the short-term relief and the long-term responsibilities of accepting aid.
Loans backed by Fannie Mae and Freddie Mac (two-thirds of US mortgages) allow consumers to request a forbearance for up to 12 months. Many banks also offer payment suspension plans for non-government backed home loans.
- What happens when consumers receive a loan forbearance: During a forbearance period, the lender agrees not to initiate legal action on the home. The bank also waives late fees and penalties. In exchange, the borrower agrees to resume payments at the end of the forbearance, in addition to catching up any missed payments, which can include principal, interest, taxes, and insurance.
- Plan for It: Consumers enrolling in a mortgage forbearance should have a plan to catch up on the mortgage. One viable option is to apply for a loan modification, which offers a more permanent solution. A modification can lower the interest rate, convert the loan from a variable to a fixed rate, reduce monthly payments, or extend the loan term.
Between federal regulations and state or county executive orders, most tenants also have the opportunity to miss rent payments because of the widespread moratorium on evictions. In some cases, companies will even waive late fees and penalties associated with the delayed payments.
- What happens when consumers miss rent payments: An eviction moratorium does not suspend or eliminate rent payments. It only delays eviction proceedings. When the moratorium lifts, those who fail to catch up rent payments could face eviction.
Student Loan Payments
The Department of Education waived loan interest on federally held student loans for 60 days starting March 13, 2020 and approved a 60-day administrative forbearance for borrowers requesting help. Delinquent loans automatically move to the administrative forbearance to prevent the debt from becoming further delinquent.
- What happens when consumers defer student loans due to the coronavirus: Unlike mortgage and rent payments, student loan debt does not compound during a forbearance. When the payment suspension ends, borrowers begin making payments based on the previous payment schedule. Borrowers with a long-term decline in income may change repayment plans or transfer the loan to an income-based program.
While some states currently ban repossessions, borrowers who anticipate payment challenges should contact the lender immediately. Many lenders have new assistance programs for consumers affected by the pandemic.
- What happens when consumers miss car payments: Programs include payment suspension, lower interest, or refinance options. In some cases, the lender will move missed payments to the end of the loan term, allowing consumers to restart payments without having to catch-up past due amounts.
Credit Card Payments
Credit card companies are working directly with consumers affected by COVID-19. Assistance can include suspended payments, lower interest, no late fee charges, and in some cases, increased lines of credit. Card servicers offer help on a case-by-case basis, meaning not everyone will qualify for the same relief.
- What happens when consumers miss credit card payments: When credit card providers waive late fees and monthly payments, interest typically continues to accrue, but borrowers do not face a mounting minimum amount due. Once payments resume, creditors calculate the minimum amount based on the current outstanding balance.
Due to the long-term consequences of some levels of assistance, consumers must choose what relief to accept. Most payment help requires consumers to reach out to lenders before receiving concessions. Some support, such as skipping the rent for one or more months, could create a financial hardship down the road. Others, including student loan deferments and credit card payment waivers, will likely bring needed relief without adverse long-term effects.
About The American Fair Credit Council
The American Fair Credit Council (AFCC) is a non-profit trade association representing consumer credit advocates who work on behalf consumers seeking to resolve their debts through the process of negotiation and settlement. AFCC Member Companies operate under a “No Advance Fee” model, and never charge a fee to consumers until a debt has been resolved. AFCC Members must also adhere to a strict “Code of Conduct”, ensuring they operate with the highest level of compliance, transparency and integrity. If you are currently experiencing a financial hardship, and having trouble making payments, you may locate a member company using our online search tool to learn more about programs to help you resolve your debt.