What is forbearance and is it right for me?

Forbearance is a form of loan assistance that lets you postpone or reduce payments for a period of time.

Zack Sigel 1600

Zack Sigel

Published April 26, 2019

Forbearance is a form of loan assistance that lets you postpone or reduce payments for a period of time. Forbearance can be as short as a few months or as long as a year and sometimes more.

However, depending on the loan and the lender, you may still be charged interest while your loan is in forbearance. This can help you when you’re in a bind, but it could end up costing you more in the long run. You’ll still need to pay the postponed loan payments later on, either as a lump sum after the forbearance period ends or by making the payments in the future.

You may be able to get forbearance for student loans, mortgages, auto loans, and personal loans. Forbearance can help you avoid defaulting on your loan, which could hurt your credit, cost you a lot of money in fees, and even cause collateral (like your home or car) to be seized.

The terms of the forbearance agreement will depend on the lender. But forbearance may not be your best choice if you qualify for other types of loan modifications, such as income-driven repayment, deferment, or cancellation.

In this article:

Who qualifies for forbearance?

To qualify for forbearance, you have to meet certain standards set by your lender. In most cases, that means you must be suffering some kind of hardship, although lenders differ about what qualifies as hardship. The following situations may qualify you for forbearance:

  • Financial hardship, like unemployment, underemployment, reduced income, business failure
  • Increased expenses, such as increased property taxes or mortgage payments
  • Disaster, both natural and man-made, whether insured or not
  • Separation from a co-borrower, such as divorce or any other kind of relationship in which one or more people make loan payments
  • Medical hardship, such as long-term disability or serious illness, including when suffered by someone you care for
  • Death of a co-borrower or the primary or secondary wage earner in your household
  • Relocation or transfer for your job, including going on active duty in the military
  • Any other reason, provided you can prove that it causes you hardship

Type of loan

There are different rules governing forbearance depending on the type of loan you have; student loans have different forbearance, deferment, discharge, and cancellation rules than mortgages, for example.

Federal loans, such as federal student loans, are usually eligible for forbearance. But private loans may not be, so you need to check with your lender.

In most cases, if your lender allows you to consolidate your loans into one, then that consolidated loan may only be eligible for limited forbearance — such as shorter forbearance periods — or none at all.

How to apply for forbearance

As soon as you realize you can’t make your next loan payment, call you lender. You’ll be given several options to avoid becoming delinquent on your loan. Becoming delinquent is bad enough for your finances, but it could lead to default, which is even worse.

Your lender will have you fill out a form. The form will include information about you, including the reason for your hardship and an estimation of how long you expect the hardship to last.

You’ll be asked about your income and assets, including any real property you have as well as CDs, stocks, bonds, or cash. That will be contrasted with your current expenses, which may include everything from food and utilities to your life insurance premiums and cable bill.

If your loan is secured by an asset, such as a mortgage (which is secured by your house), then the forbearance form may ask about the property. You’ll need to describe any liens on the property.

You’ll also need to provide relevant documents, such as income statements or medical results, depending on the cause of your hardship.

After you apply for forbearance

Once the lender has processed your application, you’ll receive a notice about your forbearance plan. The forbearance plan should list the length of your forbearance period as well as the date on which you have to start making payments again.

If interest continues to accrue while your loan is in forbearance, the forbearance plan should state that.

Automatic forbearance

In some limited cases, you don’t necessarily need to apply for forbearance. For example, when you apply for loan modification, such as loan discharge, a repayment plan, or consolidation, you could be granted a short forbearance period — usually no more than 60 days — while the lender processes your application.

You may be granted a short forbearance period even when you apply for forbearance or deferment, but if your application is denied then you’ll have to resume paying back your loan as normal.

Can forbearance hurt my credit?

Unfortunately, forbearance can initially hurt your credit. However, your credit shouldn’t be affected during the period your forbearance is in effect.

While applying for forbearance may temporarily lower your credit score, it won’t harm your credit as bad as delinquency or a default. For that reason, if you think you’re going to default on a loan, always ask your lender for your options first.

Taking a hit to your credit isn’t great, but it’s better than losing your home or having your wages garnished because you fell behind on your payments for too long.

Deferment vs forbearance

Deferment and forbearance often mean the same thing. In both cases, you’re allowed to delay making payments on your loan. Some lenders use the terms indiscriminately, but others make a distinction between them depending on the type of loan.

For example, the student loans issued or backed by the U.S. Department of Education may be deferred for reasons of personal circumstances (like if you’re still in school, or join the Peace Corps), but it also offers forbearance for reasons of hardship.

Eligibility

Deferment is often situation-based, such as deploying in the military. If you’re still in school, you can defer federal student loans until you graduate and even while on a supervised training program, such as an internship, clerkship, fellowship, or residency.

But forbearance is usually needs-based. Lenders that offer both forbearance and deferment may distinguish between them this way, but lenders that offer just one or the other may allow eligibility for both needs-based and situation-based circumstances.

Interest

For student loans, interest will not be charged on a subsidized loan that is in deferment, but it will be charged on an unsubsidized loan. (A subsidized loan is backed by the Department of Education.) With forbearance, interest is usually charged during the forbearance period.

If interest accrues to your loan during a deferment or forbearance, you have the option of paying it during the postponement period.

Length of time

You can usually apply for a forbearance period of up to 12 months over the life of the loan, although this will vary by loan type. Some lenders offer forbearance in three-month increments, and they may limit maximum forbearance time depending on the type of hardship you experienced.

Deferment often lasts for 12-month increments and can last for a maximum of between 48 and 60 months, depending on the loan and the lender.

Other options instead of forbearance

If you’re at risk of defaulting on your loan, you have several options. Forbearance and deferment can help you delay payments, but certain types of loans, like federal student loans, come with additional protections.

If you can choose one of these other options instead of forbearance, you might save money on interest. Some of these options cancel the loan outright.

Forgiveness

You may be eligible for student loan forgiveness if you’ve worked in public service for a long time, including working as a public defender or nurse, or serving in the military or Peace Corps. Forgiveness means you no longer have to pay the loan; it’s effectively canceled.

Income-driven repayment (IDR)

Income-driven repayment, also known as income-based repayment (IBR), allows you to modify your student loan payment in proportion to your earnings. It can even reduce your monthly payments to $0 per month, if you qualify. However, not all student loans qualify for IDR/IBR.

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