Everything You Need To Know About Loan Deferment During COVID-19
20.04.2020 by Dimi V
The world is poised in a bizarre position right now. COVID-19 has come along and disrupted life for just about everyone. This means that a lot of people are either temporarily without a job, furloughed, permanently let go, or have to face a pay cut. You are most likely in this situation, or this pandemic has at least disrupted you to the point where your income isn't as steady as it usually is.
Consequently, this presents a significant issue for anyone with a personal loan. You have repayments to keep up with, but you lack the funds to cover them. When you agreed upon the loan terms, you could easily manage the payments. But nobody saw this situation happening! So, what can you do?
Thankfully, you can attempt to make life easier for yourself during this challenging time. The main issue is that you aren't earning as much money as you usually do. This makes it impossible to pay off your loan while also paying for food and other essential expenses. As such, you may want to consider deferring your personal loan until you can afford to make repayments. The government has also issued a few rules and regulations to try and help people with loan payments to make.
Don't worry, we will discuss everything you need to know in this guide!
What is personal loan deferment?
Deferring a personal loan means that you freeze the payments for a brief period. However, you aren't getting rid of those frozen payments. That's not what deferment is about. Instead, you push the payments back beyond your loan term. In effect, you're delaying them until you can afford to pay for them.
As an example, let's say that you defer the next two months' worth of repayments on a personal loan. Now, you have no repayments to worry about during these upcoming months. As such, you're free to save money and pay for all your essentials without worrying about the loan on top of everything else. Those deferred payments will be added on as two extra months at the end of your loan. Let's say you initially had a 24-month loan term date; this would now become 26 months.
So, you're not skipping any payments or being given any money off the loan; you're just moving the dough to a more suitable time.
Why is this advantageous?
The critical advantage of deferring a personal loan is that you get a slight bit of financial relief during this challenging period. If you are temporarily out of work or without your full salary, then freezing your payments for two months can give you enough time to save money or return to work. If the lockdown lifts after two months, then you're back to earning a full wage and can keep up with your repayments as usual.
Furthermore, loan deferment means you aren't technically missing any repayments. This is highly significant when it comes to your credit rating. Typically, missing payments on loans is a surefire way for your score to crumble. This will then put you in a precarious position if you needed to apply for a loan in the future. Sadly, lots of people are missing payments because of the coronavirus crisis. You don't need to do this if you defer your personal loan!
Additionally, it's worth noting that many lenders charge extra fees for late payments. This will be tacked onto the payments that you missed, and it all has to be paid at some point. By deferring the loan, you won't be subjected to these fees or charges.
Overall, it can provide you and your family with some much-needed financial stability during this challenging time.
How do you defer a personal loan?
The good news is that deferring a personal loan is incredibly easy. All you need to do is call your lender and tell them about your situation. Inform them that you're in a tight financial situation because of the current crisis. Then, ask if you can defer the payments for as long as you see fit.
They will usually ask more detailed questions about your position to see if you're being genuine or just looking to defer for the sake of it. Luckily, most lenders will let you defer your payments for an agreed-upon period. Right now, you shouldn't have any trouble as new government regulations are enforced on the lending industry - but we will go into that in more detail later on.
Be aware of two crucial things:
- Always contact your lender before deferring payments. Don't miss a payment and then say to them afterwards that you planned on delaying and paying them later. Your credit score will be impacted, as this is technically a missed payment. Plus, they are well within their rights to charge you a late fee.
- You may not be approved instantly. This is purely because lenders will be dealing with high volumes of borrowers asking for deferment right now. If possible, try at least 10 days before your next payment is due, to defer that one hopefully.
- Must offer an up to 3-month payment freeze on personal loans
- Can allow customers to pay a token amount if they wish, but this is not enforced
- Credit ratings will be protected, so payment freezes don't have an impact
What is the government doing to help borrowers?
The UK government has put some measures in place to help borrowers during this pandemic. Currently, the FCA unveiled some new measures on 14 April 2020. With regards to personal loans, this meant that lenders had to abide by the following:
Essentially, the FCA has ruled that your lender has to let you defer your loan for up to 3 months if required. The token payment is optional. Some people can still afford to pay part of their monthly repayment, so there's the option to do this if you wanted. The only advantage is that you have less to pay when the time comes to repay your deferred payments.
It is well worth staying updated with the FCA regulations as they could change in the future. It's expected that this pandemic could last for many more weeks, with the financial implications hurting you for months to come. As of right now, the FCA rules that 3-months of deferment is the maximum a lender is obliged to give you. However, that could be extended if the circumstances get worse.
Does all of this apply to logbook loans?
Many of you reading this will be worried as you have a logbook loan that you're unable to repay right now. You'll be pleased to know that all of the above rulings do also apply to logbook loans. The FCA has been very clear in getting this point across!
Therefore, if you need to defer the payment of a logbook loan, then follow the steps outlined earlier in this guide. Contact your lender, and they are legally obliged to offer the three months - or less, depending on what you need.
What happens to interest when you defer a loan?
Your personal loan will have an interest rate tacked onto it. This is basically how the lender earns money from handing cash to other people. When you defer a personal loan, this doesn't mean that the interest rate freezes.
This is very important as it impacts the total amount you'll have to pay.
Let's say you defer for 3 months. You don't need to make your monthly payments, but interest can still be charged. Then, interest is still charged when you make your deferred payments at the end of the loan term. Effectively, if you have a 24-month loan that you defer for 3 months, you end up paying 27 months' worth of interest.
So, there lies the sacrifice when you're making with a loan deferment. On the one hand, you ease the immediate burden on your finances during a tough period. On the other, you end up paying more for the overall loan.
Having said that, it is worth noting that some lenders may offer interest-free deferment. It's rare, and they're not forced to do so, but you should double-check with your lender just to be sure.
Is loan deferment right for you?
Just because something exists, it doesn't mean you have to use it. If you can still pay your loan and live a comfortable life without worrying about money, then you should do just that. Deferring your payments gives you some financial respite, but it's only for people that really need it!
If you're currently in a position where you're living on reduced wages, then loan deferment might be perfect for you. It gives you a chance to breathe while your wages are cut, and you should be back in work full-time when the deferment period ends.
All in all, this should have provided you with an insight into personal loan deferment during the coronavirus crisis. The FCA regulations are in place to ensure you can freeze your personal loan if required, so consider this option if you are finding it hard to keep up with repayments.