How will financial hardship support affect my loan repayments?

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min

What arrears are and how they affect your loan repayments
The difference between short-term and long-term hardship arrangements
What happens when hardship support ends

The decision to apply for financial hardship isn’t an easy one. For starters, it likely means you’re dealing with an unexpected change in circumstances that makes it hard to meet your debt repayments. Then there’s the uncertainty around how it will affect your finances down the track.

To help you understand what a hardship arrangement might mean for your loan and repayments, let’s explore some of the common questions people have about financial hardship.

First, what does ‘arrears’ mean?

Arrears is a word that gets used a lot in hardship situations. Essentially, arrears is the sum of any repayments you miss or don’t fully pay by the due date. For example, if you’re meant to be repaying $1,000 per month on your loan and you miss three repayments, then you’ll be in arrears by $3,000 at the end of the three months.

A hardship arrangement is an agreement that you enter into with your lender that typically means you pay less on your repayments than usual while you try to resolve whatever is causing your hardship. The difference between the agreed amount and your usual repayments will be added to any arrears you already have.

Interest will still be charged on your arrears and that may increase the interest payable over time. However, in most cases any fees associated with your loan will be waived during the hardship period. It will all depend on your arrangement, which will be worked out once we’ve spoken to you about your unique situation.

Will I still pay more on my loan if I only need short-term support?

Some people only need support for a couple of months while they find work after losing their job or take time off to recover from illness. In these situations, the plan might involve a ‘payment pause’ where you take a break from making full repayments for a set period of time.

The repayments you miss during your payment pause will 'fall into arrears' and will have to be paid off once you’ve finished your hardship arrangement.

We’ll work with you to create a payment plan to help you minimise the interest you need to pay on these arrears. This plan will generally be a lump sum or a ‘collections arrangement’, where you make extra repayments for a set period until the arrears are paid off (more on this below).

What happens to my loan if I need long-term hardship support?

Other people may face longer-term financial stress, perhaps due to disability or the loss of a loved one. In these cases, it’s less likely that a payment pause will be offered as having a large amount of arrears can leave you worse off.

One option may be to convert your loan to interest-only for a set period. In an arrangement like this you stop paying any of the principal (that is, the amount you’ve borrowed from the lender) and only pay the interest on the loan each month. While this means you won’t build up any arrears, you may end up paying more interest over the course of your loan.

Another option for long-term support is to extend the duration of your loan. For example, if you extended your loan term from 20 to 30 years, the amount you pay each month will reduce, but you may end up paying more overall because you’ll need to pay interest over a longer period of time.

While these are two of the more common options, long-term hardship can be complex and your lender will work with you to create an arrangement for your own unique situation.

How do I pay off my arrears when I exit hardship?

When you’re entering a hardship arrangement with your lender, you’ll also agree on how you’re going to repay your arrears when it ends. Some of the common options include:

Adding the missed payments to the principal amount of your loan (also called ‘capitalisation of arrears’) and either extending your loan term or increasing the amount you pay each month until the entire loan is paid out.
Making extra repayments for a short period of time (also called a ‘collections arrangement’) until the arrears you built up during hardship is paid off.

The path you take will depend on an assessment of what you can afford to repay each month, the amount you owe and how long is left on your loan. But again, there are no hard and fast rules and your lender will help to create an arrangement that works for your own circumstances.

What happens if I can’t make my hardship repayments?

If you find that you’re struggling to make your new repayments, you should get in touch with your lender as soon as possible to explain your situation and talk through your options. They could be open to negotiating a longer hardship arrangement or different terms so that you have more time to get back on your feet.

And always remember, there are free and confidential financial counselling services available to help you navigate this difficult time.