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As the COVID-19 pandemic swept through the world, mass business closures left much of the working class unable to make their regular loan payments. Though there was financial assistance made available through the government, there were many who did not qualify. Additionally, many who were eligible for either employment insurance or CERB payments, still found themselves unable to meet their standard loan payments. As a result, many households and individuals opted to defer their debt payments when possible.
According to the Canadian Bankers Association, approximately 15% of mortgage loans were in a deferral state as of May 2020. Though this temporary reprieve helped many get through the coronavirus crisis, deferral arrangements are now coming to an end. This leaves many wondering what happens next in terms of their financial wellbeing and future.
When your deferral arrangements come to a close, it’s important to be informed as to how this will impact your overall loan.
When you defer payments, you are able to skip over expected payments for a set amount of time. In many cases, this can extend up to half a year. However, the interest keeps accruing on the amount owing during this period. Additionally, though deferrals enable you to skip payments for a time, these amounts remain owing. Many mortgages have deferral clauses to prevent issues like defaults. Most major banks expanded these rules to prevent mass foreclosures during the pandemic. Now that this deferral period is ending, it is critical to have a structured approach to paying both your regular payments and the deferred amount.
While each financial institution and arrangement has different specific terms, most loan types have similar approaches to handling the payments of deferred amounts. These include:
Mortgages: Loans for homes have a few different approaches to managing deferrals. Ensure that you follow the terms set forth in your deferral agreement to prevent issues. Generally speaking, the deferred payments will be added to the overall mortgage amount, resulting in a higher amount paid by the time the loan is discharged. This would extend the amortization period of the loan.
Another scenario includes dividing the deferral amount across the current amortization period. This scenario would increase your regular payment amounts. If you were able to accrue sufficient funds to pay the entire amount owing, ensure that you discuss this prior to paying the amount to be certain that there are no associated penalties.
Loans: Generally, loans are structured in a similar manner to a mortgage. However, depending on the structure of your loan arrangement, you can discuss alternative arrangements with your lending institution. This may include an increased frequency in payments. Typically, the unpaid amounts and interest will be distributed across the overall loan, letting you discharge it at the same time while paying higher amounts. If you are unable to pay these amounts, discuss extending the loan term with your lender.
Lines of credit: If your lender enabled you to pay only interest for the deferral period, you will still need to pay the deferred payments. Should your line of credit be over the lending limit, this is the first matter to address. Once this is paid down, you can discuss payment arrangements similar to those with a loan. This will increase your monthly payment amount to address the skipped amounts. Be certain that you are acting within the parameters of your line of credit agreement. If in doubt, consult your paperwork or speak directly to the lending institution.
Credit cards: Another very common financial arrangement during the pandemic was deferring credit card debt. Some credit card companies and arrangements will take the amount deferred, divide it relative to the deferral length, then add this to your monthly payments. Others are offering a decreased interest rate on your existing credit balance, then crediting the bill after the period of deferral. To avoid any unforeseen amounts owing and obtain a specific budget, familiarize yourself with repayment terms.
Utility bills: The standard approach to paying out the deferral amount for utilities include adding a proportionate amount to your regular utility payments. This means that the total amount deferred is divided across the length of the deferral. This amount is then added to your monthly payments. If you want specific details, consult the terms of your arrangement with the utility company itself.
While it might seem overwhelming to approach repaying your deferred amounts on top of your regular payments, there are some simple steps you can take to manage the situation. By creating a detailed plan, you can prudently approach your debt situation in a favourable manner.
Gaining an honest picture of your finances is the first step in creating a plan for success. By knowing exactly what you are dealing with, you can plan for the future in a realistic manner. These steps include:
The next step is to assess the debts you have and figure out where to place the amount you saved by cutting back on your spending.
Future creditors look at your credit score and so should you. It is also important to ensure the overall accuracy of your credit report. Credit scores are assessed considering a large number of criteria; and, though this pandemic poses a unique situation, some things remain true. These include:
In the event that you find yourself unable to start back up with your payments, there are some steps you can take. These include:
When it comes to debt, there are always options. Once you gain a thorough understanding of how to manage your post-deferral debt, you can take the necessary steps to protect your finances. Though deferrals were common during the pandemic, it is the onus of the individual to handle post-deferral finances responsibly. By staying organized, crafting a quality budget, and paying the amounts you owe, you can ensure a solid financial future.
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Loans Canada is pleased to announce it placed No. 131 on the 2022 Report on Business ranking of Canada’s Top Growing Companies.
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