Americans face unprecedented financial stresses as efforts to slow the spread of the coronavirus inflict lost jobs and hours. Losing income could mean making tough choices, such as skipping a loan payment.
"If you are struggling financially due to the coronavirus, most lenders are offering temporary assistance for their customers," says Leslie Tayne, debt resolution attorney and founder and managing director of New York's Tayne Law Group. "Whatever you do, don't ignore incoming bills because you cannot pay them."
If you need to skip a loan payment after coronavirus-related setbacks, here's what you need to know.
[Read: Best Personal Loans.]
Will Banks Let You Skip a Loan Payment?
Banks understand that finances are strained for many customers right now. Your bank likely offers deferment and forbearance plans, but you will have to take the initiative and ask for help.
"In circumstances like this, when there is a declared disaster, most lenders will be willing to work with you," says Philip Georgiades, chief real estate agent at FedHome Loan Centers.
Federal regulators, through the mortgage giants Fannie Mae and Freddie Mac, are ordering lenders to provide up to a yearlong pause on mortgage payments. This applies to about half of all U.S. mortgages and is for homeowners who have lost income because of the COVID-19 pandemic.
But if you want to skip a loan payment, you will need to be proactive. Contact your lender and make arrangements before the due date to avoid penalties.
Banks such as Ally, Bank of America, Quicken Loans, TD Bank and Wells Fargo offer payment relief programs. These allow borrowers to pause their mortgage payments or avoid fees on a case-by-case basis.
Some state programs have been rolled out as well. New York Gov. Andrew Cuomo, for example, announced a 90-day suspension of mortgage payments based on financial hardship.
[Read: Best Mortgage Refinance Lenders.]
What Happens When You Skip a Loan Payment?
When you make an arrangement with your lender to skip a loan payment, you get immediate relief. You can avoid defaulting on your loan, racking up late fees and getting negative marks on your credit report.
But the amount you owe that month doesn't go away. In most cases, it's tacked on to the end of your loan term.
Even if you're working with your lender to avoid penalties for missing a payment, interest will continue to accrue on your loan. Interest charges could create a larger burden you have to deal with later.
Is Skipping a Payment Better Than Missing a Payment?
Loans placed in deferment or forbearance will not have a negative effect on your credit.
But if you skip loan payments without talking to your lender first, even during the coronavirus crisis, you'll face consequences. Those include late fees, collection activities and dings to your credit.
Missed payments will be reflected on your credit report and can bring down your credit score. Your credit can be significantly affected because payment history is the most important factor for both FICO and VantageScore credit scores.
The more payments you miss and the later those payments are, the greater the effect on your credit. "After 30 days, lenders will typically report the missed payment to the credit bureaus, which will cause a drop in your credit score," Tayne says.
A low credit score can affect future lending decisions and even influence future requests for relief, she notes. "Additionally, late fees will be tacked on to your statement, and eventually your account could go into collections," Tayne says.
The bottom line: Lenders are likely to work with you, but try to contact them before you miss a payment.
"If you already missed your loan payment, the earlier you catch it and contact your lender and discuss your situation, the better," Tayne says. "If it is your first time missing a payment, most lenders will waive late fees as a courtesy."
[Read: Best Mortgage Lenders.]
How Can You Talk to Lenders About Skipping a Loan Payment?
Here's a closer look at what you can do if you're in danger of falling behind on certain loans.
What to do if you can't pay your mortgage: "You definitely want to avoid missing a mortgage payment if at all possible," Georgiades says.
If you're worried about your ability to make payments, contact your loan servicer. The servicer can help you come up with a plan to stay on track with your mortgage payments, such as a loan modification or forbearance.
"Above all, though, your options are a lot greater if you get in touch while you are still current on your mortgage, rather than once you're already late on payments," Georgiades says.
What to do if you can't pay your student loans: Interest rates on federal student loans automatically reset to 0% for at least 60 days. You can also request to suspend payments for at least two months.
Private student loans do not have the same protections, but borrowers may have forbearance or deferment options. You'll need to contact your loan servicer to make arrangements.
"Make sure you do your research, stay informed and communicate with your lender so you know what your options are and what steps you need to take during this time," says Robert Farrington, founder and CEO of The College Investor, a financial literacy website for young adults.
Ultimately, lenders want you to repay and will exchange short-term payment skips for long-term interest gains.
"This means they will charge you more in the long run, but (you) can free up some short-term cash," says Declan Casey, analyst for Regions Bank and senior editor for personal finance website Simple Money Lyfe.
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