The current worldwide challenge has had a variety of impacts on Canadians. From the emotional blow of being unable to leave our homes to the financial hardships, thousands of Canadians have had to face over this past year. In light of many people losing their jobs or living on reduced incomes, deferral programs were made available for Canadians. Any type of loan or debt including mortgage payments, credit card debt, or school loans could all be deferred if you needed financial relief. Deferrals sound like a great quick solution to your financial woes, but are they your best option? Before you agree on deferring your payments to your lender, these are a few considerations you should think about first.
There’s a difference between debt deferral and debt forgiveness
When you decide to defer your payments, they aren’t disappearing. You will eventually have to pay your debts back in one way or another. While you’re deciding if a payment deferral is right for you, consider what will happen after the deferral period is over. In most cases, there will be accumulated interest on the debt you owe, and you could end up paying more in the long run.
Take a mortgage payment deferral for example. Once your deferral period ends, your payments will return as normal. Any interest and payments that have been built up over the last several months will need to be repaid. Instead of paying that sum upfront, your monthly payments will likely increase to make up for the time you deferred your payments.
Yes, payment deferrals are tempting, but are you (or will you) be financially ready when those payments come back around? Carefully consider what your life will look like when payments resume. Also, ensure you read (and re-read) the terms of any deferral agreement before signing it. Take special note of when your payments are intended to resume and do what you can to prepare yourself ahead of that date.
What effect will deferring payments have on your credit?
The big question many people have before they defer their payments is “what will happen to my credit score”. Because deferring payments is not considered as a late or missed payment, it should not affect your credit score. Deferring payments is an agreement you and your lender decide upon together. The only way a payment deferral could affect your score is if your lender does not adjust their system to indicate the agreed-upon deferral. However, if things are running smoothly, your credit shouldn’t take a hit.
At 4 Pillars, however, we believe that credit scores aren’t worth the hype society has built them up to be. Particularly when it comes to consolidating your debt, sometimes taking a temporary hit to your credit score is worth it in the long run.
What can you do if you can’t repay your deferred payments?
Firstly, you are not alone. When the pandemic first started, Canada faced its biggest job losses since the ‘80s. There are thousands of Canadians out there who are still feeling the financial repercussions of the pandemic. If your payments are approaching and you are unable to pay them, you will need to contact your creditor/lender to see what options they can provide.
Payment deferrals are not all bad
A payment deferral could mean the difference of a family having a roof over their head or not. So, if you’ve evaluated your options carefully and a payment deferral is your best option, take it. Just be mindful of the terms of your agreement before you sign anything. Be aware of any changes to your monthly payments after your deferral period is over as well.
Payment deferrals are a far better option than missing payments. Whether it be your mortgage, school loans, or credit card debt, missing any type of payment can result in penalty fees. In far more serious cases, legal action can be taken against you. The bank could even foreclose your home if necessary. In case you need to hear it one more time…Deferring payments is a far better option than missing payments.
The bottom line is, if you can make your payments, just pay them. Only use payment deferrals if you are financially struggling to make payments. Just because a lender has offered it to you, does not mean you need to take it. It’s not your only option.
Consolidate your debt and review your best options with our team at 4 Pillars
There is no one size fits all when it comes to a solution for those experiencing financial hardships. Whether you’re trying to decide if a deferral program is your best option or if you’re worried about payments starting back up again, the experienced financial team at 4 Pillars can help. We can not only review your best options with you, but we can create a plan customized for you to complete to help relieve your debt stress. Unlike other companies offering debt solutions, we only work for you, our clients. We don’t represent creditors or big banks; we only represent you. To book your free consultation, give us a call at one of our three locations. You can reach our Muskoka & Parry Sound office at 705-640-0187, our North Bay office at 705-980-0158, or our Sudbury office at 705-806-1252. We’re not a temporary solution, we’re here to help you tackle your debts and see them paid off for good. A debt-free life is possible. Take the first step forward today.