Financial well-being April 10, 2020 By
Our purpose at First United Bank is to inspire and empower others to Spend Life Wisely. At this time, we know supporting your financial well-being is one of the best ways we can help you and your loved ones.
With many places, including First United, offering customers loan deferral options, let’s take a moment to provide information to determine if this is a viable option in your situation.
A loan deferral is a temporary fix where a lender allows you to skip a payment, and then adds the missed payment(s) to the end of the loan.
When should someone consider using a loan payment deferral? If the unexpected happens and you foresee that you will start falling behind on your loan payment (a temporary layoff, reduced work hours, exposed/test positive for COVID-19, increase in childcare or elder care expenses, etc.), be sure to contact your lender. Explain your situation to your lender so you can get the necessary paperwork completed before you become 30 days past due. The key is to do it before you fall behind on your loan payment.
If you are in a dire financial situation, skipping a payment can be a viable option. However, it's important to understand the financial implications associated with loan payment deferrals.
Let’s review the Pros and Cons of loan payment deferral:
Pros
- Gives your emergency budget some breathing room so you can pay for your basic necessities (rent/mortgage, food, utilities, fuel/insurance for vehicle).
- Avoids incurring late fees.
- Avoids the possibility of repossession of the collateral (i.e., vehicle, boat, or business equipment)
- Prevents late payments.
- After deferring a loan payment, let’s say your unemployment and stimulus check payment provide money that can be put toward your loan. You can make a partial or whole payment and those funds will be applied toward the next payment due. For, example, if the next payment is due on August 1st, any payment made before that date will reduce that payment. Further, since interest is calculated on the principal balance (amount owed) less interest is paid by making payments sooner vs. waiting 90 days thus saving you money on interest.
Cons
- Deferring a payment will result in higher total finance charges than if you made payments as originally planned. When you skip a payment, you are not paying any principal or interest that month, but your loan's interest still accumulates over the life of your loan.
- Deferring a payment will adjust your amortization schedule which in the long-term will impact the equity of the collateral you are financing. The equity in your loan is determined by taking the difference between how much you owe and how much your collateral is worth if you were to sell it. You can determine the value of your collateral by looking at recent sale prices of similar assets, or by having the asset appraised by a qualified expert. - Equity can be positive or negative. Positive equity means your collateral is worth more than you owe on it. However, if your collateral is worth less than you owe on it, you have negative equity (and your loan would be considered “upside-down”). The goal, of course, is to strive to keep your equity positive so you do not become upside-down on your loan.
- Know for sure whether deferring (skipping) payments will extend the term of your loan, or if there will be a “balloon” payment for deferred payments due at the original maturity date. The regular payment schedule will resume once the deferred payment period ends. Depending on the loan terms, either the loan maturity date is extended for the number of payments skipped, or the final payment is increased (commonly called a “balloon”) due to deferral of payments and accrued interest. Check with your lender for clarification.
- Unless you can make additional payments to your creditor when your financial situation improves, the final cost of your loan will be higher.
- Any credit life or disability insurance coverage included in the loan cannot be provided on payments past the original maturity date.
Ideally, if you can avoid deferring your loan payment, you should. Unfortunately, sometimes loan payment deferral is the only option when you can’t make your monthly payment. Check with your lender to discuss your particular situation to see which option is best for you.
At First United, our #1 priority is to help you Spend Life Wisely. Please reach out to us if we can assist you with your financial journey.
