When your credit cards and student loans are deferred, it’s like being frozen in time. But, there’s also a monster hiding behind you…
Fortunately, there are powerful tools to prevent financial ruin from continuing, both in the public and private sectors: forgiveness of payments and postponement.
What do those two terms mean?
Before discussing the differences between the two terms, let’s talk about their great similarity. Both allow you to temporarily stop paying what you owe for your debts. Whether it’s your mortgage, your student loans or even your credit cards, payment forgiveness and deferment mean you’re 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 does the federal government offer these debt relief programs, but also many private lenders. Sounds great! What could go wrong?
This is the problem
You should think of forgiveness of payments and deferment of payments as a time of detention. As in sci-fi movies, when time freezes and everyone stops in your way, so do your lenders.
Time stops. But like in those sci-fi movies, it doesn’t stop for everyone. Some characters escape the freezing of time. They walk through the frozen landscape, keep doing things and advancing in the plot.
The same is true when you are in pardon 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 off your debt, but not for interest that accrues in your debt.
Suppose you have been terminated or fired because of COVID-19, and you have a balance of $1,000 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 kind of program that decreases or eliminates penalties or even allows payments not to be made.
Here’s the thing: as long as your payments are frozen, your interest rate isn’t. Keep running, adding up more fees you’ll have to pay once they thaw.
Deferral vs pardon of payments
So you’ll wonder, does this interest rate situation apply to both deferral and forgiveness of payments? And, in any case, what’s the difference between them?
As Business Insider has so eloquently said, “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 doesn’t accrue while you’re 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 agreement you make with your lenders. You may find that you’re signing a strange combination of these two terms. For example, there may be a freeze in interest rates for several months, but if you continue to freeze payments, interest rates will come back into effect.
There’s a big problem with both terms
Let’s say you’re already 30 days behind in paying a debt when the forgiveness or deferment period began. Unfortunately, your lenders don’t forget that fact. You won’t be charged late fees and fines during the deferment or forgiveness period, but it won’t change your circumstances in the previous days.
That’s why I’m so concerned about these pandemic-related programs. Don’t get me wrong, I think they’re powerful tools to keep those living in America from sinking into a deep debt they’ll never get out of. However, they have a history of not thinking long-term when it comes to debt.
Delaying debts doesn’t eliminate them
This should be a daily mantra for anyone who is using deferment or forgiveness of payments 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 sci-fi analogy, just because your mortgage is frozen in time doesn’t mean your house is frozen. Just because your car loan has been deferred doesn’t mean the wear and tear of the vehicle is frozen.