Having trouble with your loan payments? You may be familiar with the various debt relief options: loan deferment, forbearance, and forgiveness. These terms are often confused despite their very different meanings. Let’s take a closer look.
Deferment and forbearance are easy to confuse because they have a lot in common:
- Length: Deferment and forbearance are both temporary. Deferment can often last up to 36 months and forbearance is generally 12 months.
- Availability: Deferment and forbearance are available in most federal loans. Private lenders are not obligated to offer either deferment or forbearance, but it depends on the loan type and who services it.
- Interest: Interest is charged on loans during both deferment and forbearance periods.
- Credit Reports: Loan deferment and forbearance should be noted in your credit reports, and neither will hurt your overall credit score. Both options are less damaging to your credit score than a missed payment. Your credit score will be affected if you are late or miss a payment prior to deferment or forbearance approval.
That is where the similarities end.
Deferment is typically the first route chosen for borrowers facing economic trouble. Deferment refers to a period of time when you are excused by your lender from making payments because of specific circumstances in your life such as unemployment, economic hardship, returning to school, or military deployment. Depending on your circumstances, payments are deferred in six-month intervals for up to three years. If you do not qualify for deferment, your lender may grant you forbearance.
Forbearance is a more short-term debt relief option whereby loan payments are temporarily reduced or postponed. Forbearance programs are typically used when someone experiences an event that impacts their ability to pay, including job loss, natural disaster or major illness.
For example, the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law last week, includes a forbearance program for people that have been temporarily furloughed from their jobs, laid off or can’t work because of sickness. The CARES Act allows qualifying individuals to take a break from their mortgage payments for 90 days to 6 months, depending on their circumstances.
Importantly, forbearance is NOT a waiver or a grant. If you are granted forbearance by your lender, you and your lender should agree on a plan for making up the lost monthly payments. The options may include paying back in one lump sum, spreading the money owed out over multiple payments or modifying the