Common COVID-19 Q&A: Deferring your loan repayment and its impact
UPDATE: During the peak of the COVID-19 crisis in 2020, the Australian Banking Association (ABA) reports there were almost 775,000 home and business loans deferred1. Since the current outbreak began in July 2021, over 15,000 repayment referrals have been provided on home and business loans, with the majority of deferrals in NSW.
Last year, individuals were granted a 6 month deferral on their loan repayments (including home loans and other credit products such as personal loans and credit cards) and would not have their credit score impacted as a result, provided that they were up to date with their repayments before requesting the deferral. This was welcome news to many Aussies struggling to make their loan repayments as a result of the COVID-19 pandemic.
Your credit score & credit report during COVID-19
To ease financial stress, many banks and lenders have agreed on a new approach to credit reporting during the COVID-19 crisis. It’s great to see that this credit reporting approach is still being followed by the major banks and financial institutions into 2021.
If you’re granted a repayment deferral on your loan, your credit score won’t get impacted during the support period, confirms consumer education website, CreditSmart.
This means that missed payments during the deferral period won’t be recorded on your credit report, and your repayment history information will either be reported as ‘up to date’, or no repayment history information will be reported.
If your repayments were already overdue at the time of requesting a payment deferral, your lender will decide on how to report these missed payments after your financial support period has concluded.
Check out CreditSmart’s infographic for common scenarios on how a payment pause or deferral choice could impact your credit report.
What if I don’t have an arrangement in place?
With any lender, missing your repayments or going into default can negatively impact your credit score and your ability to obtain credit in the future. That’s why it’s important to contact your lender as soon as possible to explain the change in your financial situation, so you can understand what options are available to help you better organise your finances and repayments during this period. Depending on your individual circumstances you may be granted a repayment deferral. If your repayment deferral is due to COVID-19 related circumstances, then your credit score is unlikely to be impacted.
If you have concerns about how your credit score could be affected during this time, we encourage you to stay on top of your credit accounts and monitor your credit history.
What is a repayment deferral?
A repayment deferral or pause on your loan means that you can temporarily stop making loan repayments for the duration agreed upon with your lender, however, you will have to make up the repayments later on.
To assess whether you’re eligible, your lender will take into account your individual circumstances to determine the specifics of the arrangement, such as the length of the financial support period and the terms of your repayment deferral.
With a repayment deferral in place, the lender agrees to not take enforcement action to payments that you miss during the support period.
What does this mean for my future credit applications?
Seeking financial assistance during the COVID-19 crisis, will not exclude you from applying for credit in the future. Your credit score is an indication of your credit worthiness, lenders may use other factors, such as your income, expenses, and employment status to assess your credit application.
Can a default be recorded on my credit report during the deferral support period?
Your lender will not list defaults on your credit report if you have been granted or have requested hardship assistance with them due to the pandemic.
Will my credit score be impacted after the payment deferral period?
If you miss your repayments after your agreed support period with your lender, it could negatively impact your credit score. If you have concerns about meeting your repayments after the COVID-19 support period, make sure you communicate this to your lender to work out other arrangements.
Want to know more information about COVID-19?
You can visit the Australian Retail Credit Association’s consumer website, CreditSmart, or the Australian Banking Association website, to get a more comprehensive overview of the credit reporting practice and industry approach during this crisis.
You can also check out our COVID-19 & your finances series, which contains tips and support information to help you manage your finances during this difficult time.