How to minimize the effects of loan payment deferral
By ATB Financial 29 July 2020 5 min read
Back in March, when we all started to realize how serious the impacts of the COVID-19 pandemic were going to be, there was a lot of uncertainty and fear. Many Albertans suffered a job loss or income loss or feared they would find themselves in a bad financial situation soon.
In response to these financial hardships, ATB launched the option for customers to defer loan repayments for six months. This deferral option allowed those who needed support with short-term cash flow to pause making payments on some ATB loans. In this article we’ll discuss ATB’s loan deferral program and repayment strategies for these personal products: loans, lines of credit, MastercardⓇ and mortgages.
Understanding the impacts of loan payment deferrals
A loan payment deferral means that your payments are deferred for a defined time period. In this case, the maximum time allowed for deferral is six months. It’s important to remember that you’re still responsible for those payments. A deferral simply means you’re delaying payment to a later time.
Every type of loan is slightly different, but overall, the impacts of loan payment deferrals mean paying more interest over the life of the loan, unless you take steps like increasing your payment amounts or making a lump sum payment, which will help to lessen the impact of loan payment deferrals. The interest continues to accumulate at the interest rate stated on your specific loan agreement, even while you’re deferring the payments. When the deferral period ends, you must resume making your loan payments.
While opting for loan payment deferral is the best option for those who would otherwise default on their payments, it will impact your future finances. For example, on a personal loan, a deferral can increase your amortization period or payment amounts. This can be problematic after the deferral period ends, especially if your financial situation hasn't improved.
If you’re unsure about how your loan payment deferral can impact your future financial situation, please reach out to us. The sooner you connect with an ATB specialist, the sooner you can start moving in the right direction.
How you can minimize the impact of a loan payment deferral
In short, repayment strategies will depend on the type of loan you have.
Overall, the sooner you can start repaying the loan, the better. If you no longer think you need to have your payments deferred, you can end your deferral before the six-month mark.
If you’re deferring payments on a personal loan, review your budget and forecast how it will change in the next few months. Start repaying that loan as soon as possible. If you can cover your expenses without deferring your loan, stop deferring payments. If possible, make a lump sum payment on your loan or increase the amount of your regular payments.
Lines of credit
Your minimum payment on a line of credit is interest only. During the deferral period, interest still accumulates at the applicable rate, as set out in your Line of Credit Agreement, on the outstanding principal balance. Once your deferral period ends, all of the deferred interest payments will be due and debited from your payment account, or added to the outstanding balance of your line of credit (dependent on your payment account), on your regularly scheduled payment date when you resume making your payments.
Be prepared for this payment. If you can end your deferral early, or have the cash flow to make larger payments sooner, you’ll be in a better financial position when the deferral period ends. For more information about repayment strategies and how repayment works, visit our “Understanding deferrals” page.
Because you will not be paying either the interest on your outstanding balance, or the outstanding balance, and credit cards have a higher interest rate, interest will accumulate more rapidly compared to other lending products. If you can, take advantage of deferral options for lower rate lending products first, such as a line of credit, before deferring your MastercardⓇ payments. If your financial situation improves, you should resume your payments early or make one-time payments so you can minimize the total interest charges on your outstanding balance.
For mortgage payment deferrals, you stop paying both the principal and the interest, but the interest will still accumulate on the outstanding principal balance. When you resume making your mortgage payments, your payment amounts will remain the same until the end of the term. When your mortgage comes up for renewal, you’ll see an increase in your payment amount to make up for the principal and interest that was deferred. If you’re in the final term of your mortgage and close to paying it off, there will be a lump sum due at the end of your term to cover the principal and interest that was deferred. Be prepared for these things.
To minimize the impact, try to increase your payment amounts or make lump sum payments. The sooner you pay back that interest, the sooner you get back to paying off the principal. That means you’ll pay less on interest over the amortization period of your mortgage.
For more details about how deferrals and deferral repayment works, as well as repayment strategies, visit our “Understanding deferrals” page.
The takeaway? If you can, start making payments.
These are uncertain times, and it’s possible that some Albertans may have decided to defer their payments without fully analyzing their financial need and the impact deferrals can have. If this is the case for you, or if you believe your financial position is improving, we recommend taking a look at your expenses in comparison to your income and re-evaluating whether payment deferral is necessary to make ends meet. Having a little extra cash during this period might not be worth the impact on your long-term finances if it’s not entirely necessary.
If you’re deferring multiple loans or expenses like utilities or property taxes, take a good look at all of your options. After reviewing your budget, you might find that you can start repaying one or more of those loans or expenses. If so, begin repaying the one with the highest interest, like a credit card balance. Then you can avoid interest accruing at a higher rate and minimize the impact on your future finances.
ATB can help
If you’re concerned about resuming payments on your loan, line of credit, mortgage or MastercardⓇ when your deferral period ends, reach out to us before that time. The sooner you connect with us, the more options we can explore to help you navigate and manage your upcoming loan repayments. We can also help you create a budget for the future, so you can feel confident about your financial situation moving forward.
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