Don’t skip loan payments during COVID-19
As part of the COVID-19 financial relief efforts, some creditors are offering forbearance on some loan payments for a few months.
That could be a good deal for some consumers, but they must read the fine print of the agreement, said Cindy Clampet, Oklahoma State University Extension assistant family resource management specialist.
“Institutions such as mortgage or car finance companies, credit card companies and even some banks are allowing customers to skip payments during this time of crisis. Some companies may even offer this deal with no additional interest during the time of forbearance, which could be up to nine months,” Clampet said. “Although many individuals and families are in need of financial relief such as this—especially those who are now without jobs—it’s important to be very careful with these offers.”
When working with a lending agency, Clampet said it is important to read all of the fine print. Consumers may discover the entire amount of the deferred payments is wrapped up in a so-called balloon payment, or one large amount, that is due at the end of the deferment.
In addition, she said if the entire sum is not paid by that deadline, the deferred interest could be added on as well.
The risk is that a consumer’s best intentions to minimize costs and penalties by taking advantage of the offer could turn into a larger liability. The debt could be turned over to a collection agency.
“You could be putting your home or car in danger of repossession, as well as lowering your credit score,” Clampet said.
For example, consider a homeowner who makes a monthly mortgage payment of $1,000, and the mortgage company offers a three-month forbearance with no additional interest. Clampet said customers who opt to skip payments in April, May and June will still owe the mortgage company $4,000 on July 1. Missing that target opens the door to interest accrued for those three months as well.
“It’s so important to carefully read the terms of any agreement you sign. Not all forbearance agreements work the same way,” Clampet said. “Some may add the deferred payments to the end of your loan. Keep in mind the word forbearance isn’t the same as loan payments being forgiven. You’ll have to pay at some point. This is why you must be careful about what you sign. Be sure you understand all the terms of the offered contract before signing in an effort to avoid putting your financial health at risk. Consumers who aren’t able to reasonably meet the terms of the contract shouldn’t sign it.”