Some borrowers did not realise the true cost of a Covid-19 loan repayment 'holiday'

Monday, 18 October 2021

Last year’s national Covid-19 lockdown caused incomes to plunge for many businesses and households. Many borrowers asked lenders to let them reduce, or put on hold, repayments on their loans.

Some borrowers who agreed to short-term Covid-19 loan repayment “holidays” didn’t realise they would end up paying more interest in the long run.

Susan Taylor, chief executive of the Financial Services Complaints scheme, said it was receiving complaints where borrowers had not understood that deffering loan repayents would extend the term of the loan.

As a result they would end up paying interest over the life to the loan, Taylor said.

The scheme is one of four authorised financial services disputes schemes to which people can complain, if they feel they've been treated badly by the likes of banks, insurers, finance companies and financial advisers.

**READ MORE:

Bank, insurer, lender, broker or adviser done you wrong? Complain to one of the four official financial services complaints services. First published in 2019.

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Taylor said in one recent case a woman complained after discovering the expensive downside of a loan repayment holiday she was forced to take last year as a result of a large loss of income during the first national pandemic lockdown.

The woman took out her loan in 2019, and hoped to pay it off in three years, Taylor said.

But she experienced financial hardship during last year’s lockdown, when her salary halved in the midst of the economic disruption which ensued.

The woman applied for a repayment holiday because she was not going to be able to make her monthly payments, Taylor said.

The early months of the pandemic were tough for many households, and by June last year, about 7 per cent of all home loans were on deferred or reduced payment plans.

Many people with personal loans also successfully applied for deferred or reduced repayments until their finances had stabilised.

The lender offered to let the woman stop repayments for three months, said Taylor.

But deferring three months of repayments did not stop interest from being charged, and the term of the loan was extended by 10 months.

“It was only later that year that [she] realised that her loan repayment deferral had led to her loan term being extended, and extra interest being added to her loan balance,” Taylor said.

The woman asked the lender to go back to her original loan balance and term.

The lender refused, saying she had agreed to the new lending terms, and after investigating, Taylor said that agreement was binding on the woman.

The lender had told the woman her loan would still accrue interest while the repayment deferral was in place, Taylor said.

It had also recommended she make any payments she could afford towards the loan during the holiday period.

Taylor said it was important borrowers spoke to their lenders, if they were experiencing hardship, and to make sure they understood the implications of changing the terms of their loans.

“The loan term will be extended because of the loan repayment deferral, and will mean the borrower will be paying the loan back for longer than they had originally planned,” Taylor said.