If you’re struggling with debt, there are a few things you can do to regain control of your financial life. We’ve gone over the budgeting end a lot here. However, you also have a few options for negotiating with your lenders.
This may sound like a bad path to wander down (especially for your credit score). But lenders are ultimately interested in getting back what they lent and making a profit.
The first way you can get yourself the financial breathing space you need to be able to pay them back is through loan forbearance.
In this introductory article, we will go over:
- What loan forbearance is
- Why lenders may offer you loan forbearance
- The confusion and differences between forbearance and deferment
- Loan deferment and your credit score
What is Loan Forbearance?
The term “loan forbearance” basically means temporarily postponing your loan repayments. The term itself can apply to any type of loan. In practice, loan forbearance is typically applied just to student loan and mortgage debt.
Why do Lenders Offer Loan Forbearance?
Forbearance is of course a great way to handle a temporary challenge to your finances. The reason lenders sometimes accept it is that it gives their borrowers time to reform their finances.
In the end, the borrower is able to pay back what they owe without tanking their credit scores. The lender must wait a little longer to make their profit, but ultimately everyone wins.
From the lender’s perspective, there are only a few possible courses of action when a borrower isn’t able to pay them back:
- Forcing a mortgaged property into foreclosure
- Leaving the borrower forced to default on the loan
- Deferring loan repayments
- Loan forbearance
Lenders normally have the costs of foreclosures or defaults land on their shoulders. So, it’s normally far more preferable to choose one of the latter two options.
What is Loan Forbearance vs. Deferment?
The differences between loan forbearance and deferment are clear-cut and easy to understand, but highly consequential to the borrower. For most people that don’t take subsidized federal student loans, forbearance will be the only option.
How they are the same
Both loan forbearance and deferment temporarily postpone or reduce loan repayments. They are both negotiated as an alternative to the worst consequences of being unable to repay a loan.
How they are Different
With loan forbearance, interest will continue to accrue on your loan balance, while your payments are postponed.
Loan deferment pauses your repayments while also stopping interest from accruing on your loan.
In this way, it’s clear that forbearance is preferable to the lender, while deferment is preferable to the borrower.
It’s a simple difference that has a significant impact on the borrower’s finances and the lender’s profit margins. Unsurprisingly, lenders are typically more open to loan forbearance than to deferment.
Loan deferment is a far less common agreement to come to with a lender. In general, borrowers who qualify for deferment will choose that option without having to think about it.
Qualifying for loan deferment is normally the result of a specific kind of loan. Loan deferment is an option for many people with student loan debt from subsidized federal student loan or Perkins loans.
Deferment may be provided under the condition that the borrower is unemployed or can prove that they are facing significant financial distress.
In any case where you do not qualify for loan deferment, you still probably have a shot at gaining loan forbearance. It is typically the choice people make when:
- They do not qualify for loan deferment
- They face temporary financial challenges that can potentially be overcome by pausing loan repayments for several months
Does Loan Forbearance Affect Your Credit?
Loan forbearance should not have any effect on your credit score.
Loan deferent should not impact your credit score at all either.
In general, it will make it onto your credit history. It will show up on your credit score as a note/report, but will not impact your credit score itself.
Lenders report loan forbearance and credit events of all kinds regularly. But credit bureaus do not take these events as a negative, so long as you stick to the arrangement you came to with your lender.
Timing and following your loan agreement at all times is the key here. If you are late to make your payments before you get loan forbearance, your credit score will be affected.
Conclusions
The information we’ve already covered has been consistent for some time now. However, the CARES Act (Coronavirus Aid, Relief and Economic Security Act) permitted consumers to be in forbearance for up to 180 days. The forbearance was in effect for 15 months, and ended on June 30th, 2021.
The above exceptional forbearance arrangement is separate from any other forbearance arrangement you have reached with any lender. If you are unsure about the terms of any loans you have and whether they are in forbearance, you should contact your lender as soon as possible.