The information that the Australian Bureau of Statistics (ABS) released in April 2020 indicated that there was a three-per cent increment in the number of unemployed people that month compared to in March. Plenty of citizens were experiencing tough moments as the coronavirus, or COVID-19 pandemic was underway. As a result, the following weeks involved plenty of lenders and other financial service providers coming out with financial support offerings. The solutions aimed to help their clients who are struggling from financial difficulties that have been the offshoot of the coronavirus outbreak.
Also, during the global healthcare emergency, several banks have offered some financial options when it comes to personal loans to assist their borrowers. Some of them have permitted fee waivers, offered slashed interest rates, as well as postponed loan repayments. Consumers may find the offerings of their lenders relieving. However, they should remember that these financial choices may also feature some drawbacks.
Loan Repayment Bailout and Interest Capitalisation
Personal loan clients applying for loan repayment relief have several aspects that they need to comprehend. Depending on the bank, if a client freezes his loan repayments, he could get hit by interest capitalisation further down the track. Consumers should be aware that plenty of lenders have been incorporating interest capitalisation on their loan offerings. These add-ons mean that the bank combines the interest that the consumer would have paid (had his loan repayments not got frozen) to the principal of the latter’s loan. Thus, the loan customer would wind up settling interest on his unpaid interest as well. If a loan client pauses his loan repayments today, that could mean therefore that, after the loan freeze period, he has a more substantial repayment to make.
4 Recommended Actions to Take When Applying for Loan Repayment Relief
1. Shop for the best loan repayment deal.
Loan customers have the option to discover the most optimal loan repayment offering for them. Also, if they can afford to carry on making their regular loan repayments, then, they should continue their favourable activity.
2. Find a loan repayment deal with a low interest rate.
Before he applies for a loan repayment relief, a consumer should initially consider the diverse choices available. A loan client who struggles with a high interest rate can avoid this inconvenient scenario by refinancing a loan with a low rate. This advantageous option allows him to decrease the cost of his credit, as well as enjoy reduced monthly repayments and lowered interest costs.
3. Make sure to understand the details of the loan.
Personal loan clients who are seriously pondering on applying for a loan repayment relief on the borrowed funding they had secured should read all the information relating to the bailout. After ensuring that they have comprehended the details and they have no further questions, then, they can make their decision. Consumers could find that their lender extends their loan’s life or increases their monthly repayments. Hence, these clients should know what will happen once the period of the repayment relief concludes. In this manner, they would not feel caught off guard when they encounter an undesirable surprise. Also, they should always remember that there are other financial relief choices accessible to them. Therefore, they should continually check with their lender regarding their offerings.
4. Ensure to save the funds intended for the loan repayment.
A consumer must save the money that he will use to settle his loan repayments. He should remember that he might spend it, which could then create a problem. Therefore, if a personal loan client ends up applying for loan repayment relief, the money he has set aside will cover the future repayments properly when the relief period ends. Also, those saved funds could serve as extra savings for him if he does not utilise all of them for the repayments.
By considering these four recommended actions when securing a repayment relief, a loan consumer will get to settle his repayments in a smooth-sailing manner. These tips help loan customers mitigate the negative impacts of the coronavirus crisis on their finances as well.
Effects of Loan Repayment Freeze to Credit Scores
Lenders across Australia have been helping loan clients who are grappling with their repayments in various methods. As of April 2020, approximately 40 loan providers are offering loan relief during the coronavirus pandemic. For up to at least three months, borrowers can enjoy repayment freezes that the majority of these financial service providers offer.
Consumers may find the concept of a loan repayment freeze as worrying when it comes to thinking about their credit scores. However, they should not feel anxious. In April, the Australian Banking Association (ABA) declared that clients’ credit scores would not get affected if they had required taking out a repayment postponement during the coronavirus crisis. This decision of the ABA involves home loan clients and other credit product classifications, such as credit cards and personal loans.
Mike Laing delivered the same insight as the ABA. He affirmed that, when it comes to their credit scores and repayment freezes, personal loan clients do not have to feel anxious. Laing cited that, after all, consumers, whose banks granted them COVID-19 help, a payment postponement or pause, would not have those details appearing in their credit reports as a missed payment. The chairman and chief executive officer of the Australian Retail Credit Association (ARCA) remarked that no repayment history detail would get reported instead, or “up to date” would be the report for such repayment history information.
Furthermore, the ARCA head revealed that banks would not list defaults against any client that they had given aid because of coronavirus crisis-induced difficulties. Laing relayed that, under the COVID-19 climate, banks comprehend the financial stress that plenty of consumers experience. He added that these lenders are compassionate at this point, which is similar to moments when people’s employers make them redundant, and for recent bushfires survivors.
Impacts of Repayment Freezes to Future Loan Possibilities
The ABA and ARCA’s Mike Laing have confirmed that, in a consumer’s credit report, lenders would not presently consider repayment freezes. But consumers should understand that there are some factors that banks consider that may impact loan applicants’ likelihood of securing a personal loan later. Laing remarked that, during the evaluation of a loan application, credit providers not only assess a loan applicant’s credit score but also take other factors into account. These elements that are typically not in the credit report of the consumer are employment status, income, and expenditures.
The ARCA chairman also said that banks typically look at an applicant’s entire situation before approving his loan. These lenders do not merely look whether that consumer required assistance with repayments during the coronavirus pandemic. Laing cited that asking for aid from one’s bank during the coronavirus pandemic would not disqualify that applicant from applying for credit in the future. Plus, he said consumers should remember that, when banks evaluate an applicant for a credit or loan application, most of them do not merely depend on a single credit score.
With the coronavirus crisis still affecting consumers nationwide as of June 2020, personal loan clients can still enjoy the borrowed funds they had secured. They need to understand the terms of the repayment relief and see eye to eye with their financial service providers. Also, these consumers should always keep their lines of communication open for further understanding. In this manner, it would be seamless for them to manage their finances amid the ongoing international healthcare emergency.