Loan Forbearance vs. Deferment – What’s the Difference?

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If you lost your job due to COVID-19, you may be able to get a loan forbearance to help you financially during this unprecedented time. However, you may be concerned that a loan forbearance will affect your credit score.

What is a loan forbearance? How is it different from a deferment?  

A loan forbearance generally provides a temporary reduction in your monthly payments or a possible temporary suspension of payments over a period of time, depending on the type of loan. With a forbearance, once the allotted extension is up, you will generally need to resume monthly payments as well as pay back the amount you owe from the loan forbearance and any interest and fees on top of the regular monthly payments.

A deferment is different from a forbearance. A deferment also suspends monthly payments, however, there are generally no fees or interest added. The suspended time will be added to the end of the loan. For example, if you are eligible for a deferment on a particular loan for three months, the three months will be tacked on to the end of the life of the loan.

Technically, a difference between forbearance and deferment is that the money owed after the forbearance period is paid in a lump sum; however, some issuers will work out a payment plan. 

It’s important to note that in order to get the loan forbearance or a deferment, you need to contact the lender or issuer and ask about a loan forbearance or deferment.  School loans through the Department of Education automatically put a forbearance in place (see below).    

According to the Consumer Financial Protection Bureau, this suspension of student loans applies to loans held by the federal government. This does not apply to private student loans, or if any of your federal student loans are through a commercial lender or the school.  You would need to contact the servicer of those loans separately to discuss any relief options.

You can request a loan forbearance for a mortgage, a student loan, and/or a credit card. 

Lenders typically do not offer deferment for a mortgage;  yet other lenders use the words forbearance and deferment interchangeably. It’s best to contact your lender to find out what relief options are available to you. You can ask for a deferment for a student loan; however, please see point #3 below for the relief that is currently being provided by the Department of Education due to COVID-19.  And, you can ask for a deferment for a credit card as well; each issuer has their own relief programs.

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Four questions to ask about loan forbearances in the age of COVID-19

According to a recent survey from Lending Tree, 1 in 5 people didn’t know they could ask for help due to financial hardship during the COVID-19 pandemic. It’s always better to ask for help than to skip a payment without notifying your lender, which can negatively affect your credit score. Read below to see how a loan forbearance may help.

1) Can I get help if I can’t pay my mortgage?

According to the Consumer Financial Protection Bureau, under the new law called the CARES Act, as a result of the coronavirus pandemic, homeowners have “a right to request a forbearance for up to 180 days,” and can “request an extension for up to another 180 days.” To receive this forbearance, your mortgage needs to be a federally backed mortgage, which many are.

Be proactive and contact your mortgage lender. If your mortgage is not federally backed, call your loan servicer and explain your financial hardship. Ask what type of programs they have in place. 

In addition, many states are offering mortgage relief for homeowners as well. Check your state’s website for information.

2) Should I look into forbearance for my credit cards?

Contact your issuer and ask what type of relief programs they have that you would qualify for. Forbearance may be an option, but there are pros and cons to consider. For example, you may be able to suspend payments for a period of time without paying late fees. However, the interest you accrue may offset the benefit from suspended payments.

3) Can I get a forbearance on my student loan?

According to the U.S. Department of Education, all payments owed from March 13, 2020 through September 30, 2020 are temporarily suspended. If you made a payment on March 13th or later, you should be able to  receive a refund. If you have an auto-debit set up, and a payment went through since the bill was signed on March 27th but is retroactive to March 13th, contact your loan servicer for a refund. The interest is set at 0% during this time period as well. Contact your loan servicer to confirm that your student loan qualifies for this temporary relief.

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4) Does a loan forbearance negatively affect my credit score?

If you need to request a loan forbearance under the CARES Act, missed payments should not be reported to the credit bureaus. Make sure you have the agreement with your lender in writing first; otherwise, late fees could be reported, which could negatively affect your credit score.

However, at any other time, a loan forbearance for a mortgage won’t necessarily spare you from being reported to the credit bureaus. If you miss a payment, although the lender agreed to a forbearance agreement, it is usually considered delinquent. The reason for this is because the forbearance agreement is different from your original agreement. It is important to note that the lender is not required to report missed or late payments. Make sure you ask your lender about their reporting policies.

While a loan forbearance for student loans will be included in your credit report, it should not hurt your credit score as long as you have a forbearance agreement in place before missing any payments. 

If you enter into a forbearance program for your credit cards, any missed payments should not be reported, but the accrued interest will create a higher balance that could raise your credit utilization rate. This, in turn, could negatively impact your credit score. 

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