Financial Help & Debt Relief For Those Impacted by COVID-19
COVID-19 has shaken economies all around the world and has cast uncertainty over the future of the global economy. In the US alone, a record of 3.3 million people filed for unemployment the week of March 23.
To combat the economic downturn the Federal Reserve has dropped the rate at which banks can borrow to near 0%. By doing so, the Central Bank hopes to encourage borrowing and spending.
When the economy is in expansion, the Fed increases interest rates to keep inflation under control. As the economy contracts and heads into a recession, rates are being drastically lowered with hopes that easy access to capital will result in stimulating activity in the economy.
The last time the key rate was lowered to near zero was during the 2008 financial crisis. With the spread of COVID-19 all over the globe crashing world economies, the Federal Reserve has once again embarked on policies to make lending conditions easier.
For everyday borrowers, this means that the US Prime Rate (the rate at which banks lend out money) is about as low as it will ever be; 3.25%. The government has also released a stimulus package that will give consumers, students, and small businesses access to loan and debt relief programs.
The Latest Stimulus Package Proposal And What That Means
- Checks For All: Implementing the CoronaVirus Aid, Relief, and Economic Security Act (CARES) allows for most Americans to receive a one-time payment of $1,200 for adults and $500 for each child 16 years old and younger.
- Personal Loans And Lines Of Credit: The Federal Reserve System, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency, announced that Savings Associates and Credit Unions will be offering small-dollar loans to consumers and small businesses that are suffering from cash flow issues, income disruptions, or unexpected expenses. These loans could be structured as either closed-end installment loans or open-end lines of credit.
- Student Loan Interest Waived: It was recently announced that all interest on Federal Student Loans, which typically bear a rate of 5.5%, has been waived until further notice.
- Mortgage Forbearance: Under the CARES act homeowners with other types of debt to service may be eligible to put their mortgage into forbearance and delay payments for up to 6 months. The act also stops any foreclosure proceedings undergoing against those who have certain types of mortgages.
More Personal Loan Options May Be Coming - What To know
As mentioned above, savings associations and credit unions are being encouraged to offer low interest-rate loans to consumers who are in a cash flow crisis.
The way governments stimulate economic activity is by offering access to cheap capital.
For those who are worried about being able to pay rent or afford food and transportation, these loans will offer economic relief and encourage spending.
While the government hopes lenders will be responsible for offering loans with favorable terms these are simply guidelines and not strict rules.
There are few laws preventing lenders from taking advantage of the current situation by offering high-interest loans. Therefore, one must take care when looking at borrowing options.
Some of the basic details to consider are total APR, payment term, and loan type. Having a single payment fixed-installment loan is less desirable than a revolving line of credit.
The former works like a standard loan where the individual gets the money deposited into their account and they are required to pay back the loan through structured payments over a predetermined period.
Revolving lines of credit allow individuals to draw from the LOC as they need. Payments depend upon how much credit has been used and there is no fixed term on payment.
Avoiding high-interest loans with a fixed term is highly recommended in this current economic climate. Instead, consumers are advised to look for revolving lines of credit with low-interest rates, low fees, and no term limit.
Not Just Personal - Small Business Loans Applications Now Available Too
The Federal government is placing a great deal of importance on making sure small businesses can continue as an ongoing concern. Small businesses, which includes any business with 500 employees or less, have several emergency loan options available to them.
- SBA Loan Options: The Small Business Association has developed loan options of up to $2 million for small businesses during the COVID-19 pandemic. This loan option was set up for businesses that do not have loan options available to pay for items such as payroll, fixed debt, and other payables. The interest rate will be 3.75% and 2.75% for non-profits. Emergency grants of up to $10,000 are also available when a small business applies for this loan.
- SBA Express Loan: These are loans of up to $350,000 for small businesses that can be improved in 36 hours. The purpose of these loans will be to give small businesses access to capital in a short period.
- 7(a) Loans: 7(a) loans are loans of up to $5 million made available to small businesses. Unlike some other loans, there is no stipulation on how the money can be spent. Some loans require the funds to be spent on payroll, debt servicing and accounts payable. The 7(a) loans have no such limitation and can be used however the business desires. These loans are meant for existing businesses to expand operations and are not available to those looking to launch a new business.
- Microloans: These are smaller loans of up to $50,000 made available to small businesses through the SBA. Microloans process faster than most other types of SBA loans and can be used for any type of working capital expense, including the launch of a new business.
The Federal Government is in the process of making many loan options available to consumers and small businesses. The stimulus package also includes such measures as unemployment benefits, delaying of 2019 tax filing and payments, and tax breaks for small businesses.
While these loan options may be appealing, both consumers and small businesses must always pay close attention to the terms of the loan to avoid any unforeseen circumstances and fees.