A deferral, better known as forbearance, refers to an agreed restraint of meeting financial obligations for loan payments. However, it’s a privilege granted by your lender. Forbearance continues to mount interest rates and deferral payments do not. It is not a decision you can make on your own. A deferred loan or a forbearance is a temporary postponement or delay of your loan payments. Your lender grants a deferral period to help you pay your debt and avoid defaulting on a loan.
To successfully convince a lender or creditor to grant you a deferral, you must have a good reason. A lender might consider deferral if a borrower has experienced a significant life event, including the death of a child or loved one. Other events include job loss, major illness, or natural disaster. Even though a lender would prefer you to make your debt payments, many will consider negotiating a deferral agreement. Mostly because it isn’t in their best interest for you to default on their loan. For example, a lender wouldn’t want to eat the cost of a mortgage foreclosure. Especially when they can negotiate a few deferred or decreased payments instead.
The government has encouraged many financial institutions to work with citizens during the COVID-19 pandemic. This helps them avoid defaulting on their loans, especially their mortgages. Statistics show that 42% of Canadians are now “worse off financially” than before the COVID-19 pandemic. Deferrals have been necessary to help provide households with financial stability during a widespread job loss.
How Does Forbearance Work
All deferral agreements are different, and dependent on your lender and your financial situation. In most cases, the goal of a deferral is to give a borrower extra time to pay their debt. Remember, forbearance does not negate interest. Ask your lender what the interest rate looks like before signing a forbearnce agreement.
Additionally, deferral is not the same as debt forgiveness. You will almost always need to pay back your debt, even if it takes a little longer.
Types of Deferral
There are three main types of deferral- mortgage deferral, credit card deferral, and student loan deferral.
Mortgage deferral allows you to defer or delay your mortgage payments for an agree-upon period of time with your lender. The Canada Revenue Agency urged banks all across Canada to give mortgage holders the option to defer payments. Especially if they were affected by the COVID-19 pandemic. Moreover, statistics estimate that Canadians have deferred a whopping $1 billion a month worth in mortgage payments due to the pandemic.
Depending on your financial institution, mortgage deferral could entail extending the amortization period, moving deferred payments to the end of your loan term, and sometimes even increasing the payment amount once the deferral period ceases. If you have a mortgage with a private lender, you can still access deferment. However, you would need to inquire with your lender to find out specific terms. For example, Monster Mortgage is an alternative lender that describes mortgage deferral in this blog article.
Credit Card Deferral
Credit card deferral is a form of debt relief offered by credit card providers to customers struggling to make their payments, especially as a result of the COVID-19 pandemic. Not to be confused with debt forgiveness, credit card deferral still requires you to pay your debt, but you have more time to do so. Remember, however, that you still need to cover your interest fees even if you defer your principal payments.
Student Loan Deferral
Student loan deferral is similar to both credit card and mortgage deferral in the way that you can delay your loan payments, though this time it’s specific to your student loan payments. The US Government approved a student loan deferral for a term of one and a half years (between March 2020 and September 2021). The Canadian government had slightly different methods of aid for students struggling to pay tuition. For the Fall 2020 and 2021 years, The Government of Canada doubled the Canada Student Grant amount to up to $6,000, depending on various factors like your family income, dependents, tuition, and more. They also increased the cap on student loans from a weekly $210 to $350.
The Effect of Forbearance on Credit Score
Deferred payments do not usually affect your credit score, as do most forms of debt relief. According to Equifax, mortgage deferrals resulting from the COVID-19 pandemic shouldn’t negatively affect a borrower’s credit score. Creditors made exceptions throughout the pandemic to minimize credit burden on Canadians, and they have also been flexible in the way they report debt payments to the credit bureau. For example, a lender might report to a credit bureau that while your account is still active, the payment due is $0, minimizing any negative effect on your credit score. However, there have been instances where borrowers have experienced negative effects to their credit.
How to Fix it if it Does Negatively Impact
Even with the assurances of various credit bureaus, some creditors make errors in the way they report a borrower’s debt payments, resulting in negative impacts on credit score.
If deferral has hurt your credit score, your first course of action is to speak out. Talk to your lender if you notice a negative impact on your score, and ask them what they can do to rectify it. If you aren’t having any luck with your lender, voice your concerns on social media. When there’s a bigger audience, companies tend to take notice.
You can also make yourself aware of any changes in your credit by requesting your credit report more frequently, and monitoring it. Although one free credit report per year is the norm in most cases, credit bureaus made exceptions during the COVID-19 pandemic, allowing people to monitor their credit reports at no cost until April 2022.
Reporting your credit properly is arguably your lender’s responsibility; however, don’t let that stop you from taking initiative in looking out for your own affairs.
If you’re concerned about the effects of deferral on your credit and want to learn more about ways you can tackle your debt, take a look at our debt management plan offerings and speak to one of our consultants.