A Temporary Hold
When a lender allows a borrower to temporarily stop or suspend payments on some type of loan, that is called forbearance. There are other variations of forbearance. Forbearance can be used in a variety of lender/borrower situations and is often used with student loans.
The Basics of Forbearance
If you borrow money and then face a hardship, you can ask your lender for forbearance. Types of hardships can be wide-ranging. They range from a medical emergency, permanent disability, job loss, temporary unemployment, natural disaster, divorce, and more. Some lenders will grant borrowers a reprieve in making payments on their credit obligation in these situations.
The key to forbearance is that it is temporary. The length of time that a lender will allow forbearance varies, but it is a maximum of three years, over the lifetime of the loan, before the borrower either has to start making payments again or some other arrangement has to be made.
Forbearance can help a borrower in several ways:
- Extends the term of the loan
- Postpones the payments on the loan
- Reduces the payments on the loan
These terms have to be negotiated between lender and borrower before forbearance can be granted.
One important characteristic of forbearance that borrowers have to consider is that they should pay the interest that accrues on their debt during the forbearance period. If they don’t, the interest is added to the principal of the loan and the total interest paid over the life of the loan becomes larger.
Types of Forbearance
It depends on the type of loan what the requirements are for forbearance. There are three main types of loans for which you might get forbearance:
Student Financial Aid Loans
Student loans may be the category most often subject to forbearance applications. Student loan debt has become so burdensome that former students with outstanding loans are more likely than not to place their loans in forbearance at least once. The are for 2013 and indicate that 32 percent of student loans were never in forbearance, 48 percent were in forbearance for less than 18 months, and 20 percent were in forbearance for more than 18 months. In May 2018, over two and a half million former students were in forbearance.
Former students should realize the problems associated with forbearance such as increased interest costs during the lifetime of the loan. Forbearance should not be a way to put off repayment or a long term strategy to make loan repayment more affordable. It should be only the solution to some emergency.
There are two types of forbearance for former students and their student loans:
- The first is discretionary or general forbearance. It is available to just about anyone with any kind of financial hardship. It should be a last resort.
- Another type of student loan forbearance is mandatory forbearance. Mandatory forbearance happens if you are in the National Guard and are deployed, if you are in a medical residency or internship program, or if your payment is more than 20% of your monthly income.
Mortgage Loan Forbearance
Individuals who have a mortgage on a home and run into financial hardship due to illness or the other reasons are often eligible for forbearance just like former students are eligible for student loan forbearance under certain situations. Banks and other financial institutions that hold mortgages do understand that homeowners can run into difficult financial times for legitimate reasons.
You and your lender determine if you qualify for forbearance, how long the forbearance period will be, how much your payment will be reduced, and how much you will repay the lender. You may have to repay the lender at a higher interest rate, but forbearance will help you avoid foreclosure on your home. It could also save your credit score. Once the forbearance ends, you have to repay the principal, interest, taxes, and insurance on your home according to your forbearance agreement. You may have saved your home and your credit.
Credit Card Debt Forbearance
During the Great Recession of 2008-2009, credit card default rates rose to around 10 percent. Recently, they are going up again. Missing payments and paying late fees have a very detrimental effect on your credit and defaulting on a credit card can have long-lasting effects. Many banks that issue credit cards have forbearance programs that can offer you some relief if you are experiencing hardship. You should call and ask for their credit counselors who may be able to help you with a forbearance application.