How your finances during the pandemic are like science fiction and a horror movie
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Fortunately, there are powerful tools to prevent further financial ruin, in both the public and private sectors: forgiveness and deferral .
What do those two terms mean?
Before we discuss the differences between the two terms, let's talk about their great similarity. Both allow you to temporarily stop paying what you owe on your debts. Whether it's your mortgage, your student loans, or even your credit cards, forgiveness and deferral means you are exempt from making payments due to an extreme situation.
These terms existed before COVID-19 , but obviously, it has been shown to be the most extreme situation of our lives. So not only the federal government offers these debt relief programs, but many private lenders as well. Sounds great! What could go wrong?
This is the problem
You should think of payment forgiveness and payment deferral as holding time. Just like in sci-fi movies, when time freezes and everyone stops in your path, so do your lenders.
The time stops. But like those sci-fi movies, it doesn't stop for everyone. Some characters escape the freezing of time. They walk through the frozen landscape, they keep doing things and moving through the plot.
The same happens when you are in forgiveness or deferment of payments. But what keeps moving is not the plot, but the interest rates. In most cases, you have obtained a deferment to pay your debt, but not for the interest that accrues on your debt.
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Let's say you've been laid off or laid off due to COVID-19, and you have a $ 1,000 balance on your credit card, which has an interest rate of 20%. You call the number on the back of your card and ask for help. Almost all credit card issuers offer some type of program that lowers or eliminates penalties or even allows payments to be missed.
Here's the thing: as long as your payments are frozen, your interest rate is not. Keep running, adding up more charges that you will have to pay once they thaw.
Postponement vs forgiveness of payments
So you ask yourself, does this interest rate situation apply to both deferral and forgiveness of payments? And, in any case, what is the difference between them?
As Business Insider has so eloquently stated, "These two relief options are very similar, and many people use them interchangeably - yes, even loan and finance professionals."
Most of the time they work the same, however, they differ in:
Deferral usually means that interest does not accrue while you are not making payments. Forgiveness of payments usually means that interest does accrue.
However, you can't trust those words, you have to look closely at the fine print of any deal you make with your lenders. You may find that you are signing a strange combination of these two terms. For example, there may be an interest rate freeze for several months, but if you continue to freeze payments, the interest rates will go back into effect.
There is a big problem with both terms
Let's say you are already 30 days behind in paying a debt when the forgiveness or deferral period began. Unfortunately, your lenders don't forget that fact. You will not be charged late fees and penalties during the period of deferment or forgiveness of payments, but it will not change your circumstances from the previous days .
That is why I am so concerned about these pandemic-related programs. Don't get me wrong, I think they are powerful tools to prevent those who live in America from sinking into deep debt that they will never get out of. However, they have a history of not thinking long-term when it comes to debt.
Delaying Debt Doesn't Eliminate It
This should be a daily mantra for anyone using deferral or forgiveness during this pandemic. Although you can delay payments without accruing interest, you still have a big problem: you still owe the money.
Going back to the science fiction analogy, just because your mortgage is frozen in time doesn't mean your house is. Just because your car loan has been deferred doesn't mean that vehicle wear and tear is frozen.
When you need to start paying again, you may also need to repair something in your home or car. So remember: Just because some debts can be frozen, the rest of your life is not .
If you're not careful, that sci-fi movie can turn into a horror movie, and your spending will turn into a terrifying monster that you won't be able to escape from.