Over a quarter of U.S. adults have taken advantage of payment deferral plans in the past year as they look to address the financial challenges presented by COVID-19 and a downturn in the economy. According to Northwestern Mutual's 2020 Planning & Progress Study, 26% of Americans have chosen to temporarily suspend payments they were due to make, including those for mortgages (8%), rent (8%) and credit card (opens in new tab) bills (8%). Other payments that have been put on hold include for utilities (7%), student loans (6%), and auto loans (opens in new tab) (5%).
With coronavirus taking a grip on the economy in early spring, the best mortgage lenders (opens in new tab) reacted swiftly to provide payment flexibility (opens in new tab) for homeowners. Credit card lenders and companies behind the best personal loans (opens in new tab) also followed suit (opens in new tab), aware that lockdowns and the fragile economic situation would impact the ability of customers to meet their regular payments.
If it were needed, the research (opens in new tab) provides further evidence of this, with over one-third (38%) of Americans having taken steps to cover their living expenses since the pandemic. Almost one in five (19%) said they have dipped into personal savings or emergency funds to bridge financial gaps, 13% have borrowed money from family or friends, and 9% have borrowed from their retirement savings. Unsurprisingly, 84% of adults therefore anticipate that COVID-19 and subsequent economic downturn will have an impact on their ability to achieve long term financial security.
Should you defer your payments?
The major concern is what happens when the relief programs come to an end. The Federal Housing Finance Agency recently extended its moratorium (opens in new tab) on some evictions and single-family foreclosures through December 31, 2020. To prevent the further spread of COVID-19, the Centers for Disease Control and Prevention has also ordered (opens in new tab) that residential evictions be halted until the end of the year for individuals who expect to earn less than $99,000 and couples expecting to earn under $198,000 in 2020.
While offering a safety net in the short term, navigating such programs can remain a challenge. This is particularly true given the sense that such relief is only ‘kicking the can down the road’, leaving the underlying problems to reemerge in the not-too-distant future. So what should people do and how can they avoid the pitfalls that simply deferring payments can present?
1. Payment deferral is not the same as forgiveness
If you’re thinking of suspending payments, or remain on a payment deferral plan, remember that you are not being forgiven for what you owe. If you skip a payment today, the expectation is that it will need to be made some time in the future. While well-intentioned, relief plans often tend to merely ‘kick the can down the road’, leaving the underlying problems to reemerge in the not-too-distant future.
There is a chance of formal intervention to extend the programs further, but as the delay over a replacement enhanced unemployment benefit (opens in new tab) shows, this is by no means guaranteed. And, of course, this means the payments that are owed will only continue to build up further.
2. Consider all options
Even though some deferment programs have been made available to those still in work or not currently facing hardship, it is generally best not to take advantage of such schemes if you’re in a position to carry on paying what you should. As has already been noted, you’ll still need to pay in the future, so it’s probably worth paying it now if you can.
If you’re undecided, consider the options that you have at your disposal. Is your rainy day fund large enough to sustain your payments, or could you take advantage of low interest rates and refinance your mortgage (opens in new tab) to lower your payments rather than putting them off?
3. Where deferment can make sense
There are, of course, instances when taking up the deferral option is the right thing to do. This is particularly true if you’ve recently been put out of work and need to make your money last as long as possible. Others might need to redirect the money they’d normally use to make payments to pay for essentials such as groceries. If you’re concerned about meeting everyday expenses related to where you live and food, then making use of payment deferral schemes to free up cash is definitely the best option compared to borrowing on a credit card or a payday loan (opens in new tab).
4. Defer federal student loans first
If you have a choice over which type of payment to defer, federally-backed student loans are a good place to start. Payments on these loans can be suspended through January 2021, but importantly, interest rates have been slashed to 0% - this means interest is not being accumulated on these loans.
5. Make a post-deferment plan
Having an idea of how you'll manage financially once any deferment period ends is essential. This means weighing up your income versus expenditure, and working out whether you’ll be in a position to resume payments when you should. If you think you’ll struggle, can you cut back on your spending anywhere or is there a possibility of taking another job? Always make sure you’re claiming all the financial assistance on offer as well, including unemployment benefits and stimulus checks (opens in new tab), and apply for tax refunds that you might be owed by filing a prior tax year return (opens in new tab).
If you’re still short of where you need to be, talk to those you owe money to about the options available going forward. There may be a chance to extend your payment deferrals for even longer, giving you more time to hopefully get back on your financial feet. If debt is an issue, talking to your lenders should once again be the first step. Also, consider how the best debt consolidation companies (opens in new tab) might be able to help you better manage your debt in the future.