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How your funds are like science fiction and a horror film throughout the pandemic

October
23, 2020

6 min read

This article has been translated from our Spanish edition using AI technologies. Errors can occur due to this process.

The opinions expressed by the entrepreneur's contributors are their own.

Fortunately, there are powerful tools to prevent further financial ruin in both the public and private sectors: forgiveness and procrastination.

What do these two terms mean?

Before we discuss the differences between the two terms, let's talk about their great similarity. Either way, you can temporarily stop paying your debt. Whether it is your mortgage, student loan, or even your credit cards, forgiveness and deferment mean you are exempt from 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. Therefore, not only the federal government offers these debt relief programs, but also many private lenders. Sounds good! What could go wrong?

That's the problem

You should think of forgiving and deferring payments as holding times. Just like in science fiction films, when time freezes and everyone stops in your path, so do your lenders.

Image: Michael Longmire via Unsplash

The time stands still. But like these science fiction films, it doesn't stop with everyone. Some characters escape the freeze of time. You walk through the frozen landscape, move on and move through the plot.

The same thing happens when you are forgiven or postponed. But what keeps moving is not the action, but the interest rates. In most cases, you have been granted deferral to pay off your debts, but not the interest on your debt.

For example, let's say you've been laid off or laid off due to COVID-19 and you have $ 1,000 in credit on your credit card that has a 20% interest rate. They call the number on the back of your card and ask for help. Almost all credit card companies have programs that can reduce or eliminate fines or even miss payments.

Here's the thing: as long as your payments are frozen, your interest rate isn't. Keep walking adding up any other fees you will have to pay after thawing.

Postponement against forgiveness of payments

So you are wondering whether this interest rate situation applies to both deferral and forgiveness of payments? And what is the difference between them anyway?

As Business Insider so eloquently stated, "These two relief options are very similar, and many people use them interchangeably – yes, even credit professionals and finance professionals."

Most often they work the same, but they differ in:

Deferment usually means that there is no interest accruing while you are not making any payments. Forgiveness of payments usually means accruing interest.

However, you cannot trust these words. You need to study the fine print of every deal you do with your lenders. You may find yourself signing a strange combination of these two terms. For example, there may be an interest freeze for several months. However, if you continue to freeze payments, the interest rates will come back into effect.

There is a big problem with both terms

Let's say you are already 30 days in arrears when the forgiveness or deferral period began. Unfortunately, your lenders do not forget this fact. You will not be charged any late fees or penalties during the period of deferral or forgiveness of payments, but this does not change your circumstances from the previous days.

That is why I am so concerned about these pandemic programs. Don't get me wrong, I think they are powerful tools to prevent those who live in America from sinking into deep debt that they will never get out of. In the past, however, they haven't thought long-term when it comes to debt.

It does not eliminate debt delay

This should be a daily mantra for anyone using procrastination or forgiveness during this pandemic. Although you can delay payments without incurring interest, you still have one big problem: you still owe the money.

Back to the science fiction analogy, just because your mortgage was frozen in time doesn't mean it is your house. Just because your car loan has been on hold doesn't mean that the vehicle's wear and tear is frozen.

Image: Dylan Gillis via Unsplash

If you have to pay again, you may have to fix something in your home or car as well. So remember, just because some debts can be frozen it won't for the rest of your life.

If you're not careful, this sci-fi movie can turn into a horror movie and your expenses will turn into a horrific monster that you cannot escape.

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