The hidden dangers of paid leave

While loan repayment holidays can offer short-term relief to financially struggling borrowers, the extra interest added to the debt and the time it will take to pay it off could mean it’s just not worth it. to reduce or postpone payments, in the long term.

“We’re seeing cases where borrowers don’t understand that deferring payments extends the life of the loan, which means they will end up paying more interest over the life of the loan,” says Susan Taylor, CEO of FSCL, adding that it is important for borrowers to speak to their lender early if they are having difficulty and to make sure they understand the implications of changing loan terms.

“It’s important for borrowers to be aware of the consequences of going on ‘payment holiday’ – that is, when you take a break in payments or pay less than you originally agreed to. You’ll pay more at the end of the day, ”says Taylor.

A case brought before Financial Services Complaints Limited (FSCL) recently shows that once a borrower accepts the terms of a new loan, after applying for hardship relief, it is not possible to revert to the initial term of the loan.

When Wendy took out a loan in 2019, she fully intended to pay it back within three years. Like many New Zealanders, Wendy struggled financially during the national Covid-19 lockdown in 2020.

When her salary dropped by 50% a year after taking the loan, Wendy requested a repayment vacation because she was not going to be able to make her monthly payments.

The lender offered Wendy a 3-month repayment deferral, explaining that her repayments would change after the repayment deferral ended.

Under the new repayment schedule, Wendy’s loan term was extended by ten months and she was charged additional interest. Wendy accepted the new terms of the contract.

It wasn’t until later that year that Wendy realized that her loan deferral had resulted in her loan term being extended and additional interest being added to her loan balance.

Unhappy with the additional interest, Wendy asked the lender to let her revert to the balance and term of her original loan. The lender said the new conditions were legally binding and he could not revert to the original deal.

Wendy complained to FSCL. Although the repayment holiday meant that Wendy’s loan term was extended and that Wendy would pay more interest on the loan in total, FSCL could see that Wendy had agreed to the new terms of the contract.

FSCL saw no reason to ask the lender to reinstate the loan as it was before the repayment holiday.

FSCL also found that the lender told Wendy that her loan would continue to earn interest as long as the repayment deferral was in place and recommended that she make all payments she could afford for the loan during the period. vacation.

Ms Taylor explains that a borrower has the right to request a deferral or loan repayment vacation if they are in financial difficulty, and their lender should fairly assess their request, but reiterates that this means interest will continue to accrue. be added to the loan. The loan does not just end during the deferral period.

“The loan term will be extended due to the deferred loan repayment and will mean the borrower will repay the loan for longer than originally planned.”

You can find the case note
here.

About FSCL

FSCL is an independent, not-for-profit, external dispute resolution system that provides dispute resolution services to participating financial service providers and their clients. The FSCL process focuses on the resolution of complaints through conciliation and assisted negotiation and is also able to take formal decisions that are binding on financial service providers. The FSCL process is free for consumers. For a list of FSCL participants and more information about the FSCL visit
www.fscl.org.nz

. You can learn more about dispute resolution mechanisms in New Zealand by watching the following video: https://www.youtube.com/watch?v=KPQN_ajedxA

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About Matthew R. Dailey

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