Over the past few weeks, I’ve heard people talking about the right of offset. As I understand it, the bank who lends you money has the right to take money out of your bank account, held at the same bank, if you don’t pay your debts on time.
Wait! What? Start from the beginning, Blue Lobster…
Allow me to paint you a picture. Let’s say that you have an outstanding loan at Bank A for $7,500. And you also have a bank account at the same bank with a balance of $3,500. We can call this $3,500 your emergency fund. Or it can be your hope-to-one-day-get-on-a-plane-again fund. Call it whatever you want. The point is, this $3,500 is money in an account held at Bank A.
Right now, we’re living in COVID-19 times. You have to prioritize your money since your income has been cut or eliminated. Maybe you’re one of the lucky ones who still has a steady paycheque coming in on a regular basis, but you’ve heard rumours of layoffs at your place of employment. You wisely choose to spend your money on shelter, food, and utilities. And maybe you’ve decided to cut certain expenses from your budget in an effort to save money. You may even have chosen to not pay your loan right now.***
*** To be extremely clear, I am not advocating this course of action. I think this option causes more problems than it solves, but you know your circumstances far better than I do. Go forth and handle your money however you think is best in your situation. ***
Let’s say Bank A notices that you’ve stopped making payments on your loan. They also see that you have money in an account at their fine institution. Bank A chooses to offset your debt with the money in your bank account. Again, the bank to which you owe money has the right to take money out of your account to pay your debt. It’s the right of offset, and its application stings!
Blue Lobster, is there anything I can do to stop my bank from taking my money?
Of course there is. The first method to prevent the bank from exercising the right of offset is to make your loan payments on time. Prevent your bank from ever wondering about your capacity to repay your debt. Banks like to get payments so pay them.
The second method is to move your bank accounts to a bank where you don’t have any loans. For example, you can move your $3500 to Bank H. Your money will be there when you need it. Of course, you will still owe the debt to Bank A and you should do everything in your power to pay off that loan.
Again, I’m going to be annoyingly explicit about this point. Moving your money to Bank H doesn’t eradicate your debt obligation. You still owe $7,500 to Bank A. Moving your money simply eliminates the risk of Bank A taking money out of your account to satisfy your debt if you stop paying your loan.
****************
Weekly Tip: Do what you have to do so that you don’t pay bank fees. For the vast majority of people, this means opening an account at an online bank. There are free bank account out there. If you’re still paying bank fees, it’s because you’re choosing to do so. Make a different choice and keep those fees in your own pocket. Use them to buy stock in the bank instead.