What is Forbearance? How Temporary Financial Relief Works & Affects Your Credit

Now, I assume we’ve all practiced a bit of forbearance, like holding your tongue when your cousin Earl questions your chili recipe. But forbearance can also involve receiving grace from a lender or creditor. It can be a life jacket when you’re drowning in debt, enabling you to get back on solid ground. 

Debt forbearance is a temporary arrangement where a lender allows a borrower to pause or reduce loan payments during financial hardship.

Reaching out for financial help when you are in need is usually the right thing to do, but you should understand what you are getting yourself into with forbearance. Come along, and I’ll teach you what you need to know so you can act quickly, and possibly get the relief you need.

Forbearance can allow you to get by, and perhaps regroup when money’s running low. It’s a temporary hold on your payments that can help you stay afloat during a hard time — but it isn’t debt forgiveness. You’ll still need to repay the money you owe.

Temporary Suspension or Reduction of Payments 

Forbearance gives you room to breathe before the financial noose pulls too tight. It allows you to stop repaying a debt for a set amount of time or temporarily reduces your payments. 

Generally, it can continue for two months to almost a year. Think of it as a blessing from the lender, allowing you to hit the snooze button on your debt.

However, forbearance is not a free ride. Interest can still accrue while you’re not making payments. Depending on your loan agreement, you may owe more money once forbearance comes to an end.

Other lenders offer a twist on forbearance: smaller, partial payments instead of a full pause. If you can swing it, that is a good middle ground. It keeps your debt from growing too wild while still giving you some financial elbow room.

Forbearance can be a lifeline when your situation is harsh, but remember, it’s only temporary. You must plan for when the forbearance ends and your regular payments resume.

Eligibility for Forbearance

Not everyone is eligible to put their payments on pause. Lenders generally save forbearance for people who can prove they are in trouble, whether that is an out-of-nowhere job loss or surprise medical bills. You’ve got to give lenders a good reason why you can’t pay up. 

Your lender will likely require evidence of your lost income, emergency expenses, and pretty much anything else that’s upending your finances. Expect requests for bank statements, pay stubs, tax returns, and even medical bills.

The forbearance isn’t quick. You will have to talk to your lender, fill out forms, and explain the situation in detail. Patience is key, but the potential relief could make it worth your time.

After that, you’ll have to wait for the lender’s verdict. Once it gives you the green light, you need to stick to the terms like a fly on molasses. Breaking the agreement will get you into even hotter financial water and possibly make your situation even worse.

How Forbearance Impacts Your Credit Scores

The good news is that forbearance shouldn’t drag your credit score through the mud, provided you respect the lender’s rules. Just remember that you will still have to honor the loan agreement. 

Most lenders report forbearance to the credit bureaus. While this note could stay on your credit report for seven years, it likely isn’t going to sink your score all that much as long as you play ball and continue to make payments once you’re ready again.

Your credit score is also based on your previous history. If you were already behind on your payments, then your credit score has probably taken a hit or two. 

On the other hand, if your record had been clean, forbearance may drop your score because credit-scoring models may assume your circumstances have changed drastically.

Forbearance vs. Deferment

Forbearance and deferment may sound just about the same, but they are quite different from each other. Forbearance suspends (or at least reduces) your payments for a while. However, don’t get too comfy with this temporary fix, as it doesn’t absolve you from paying back all your debt with full interest. 

Deferment, on the other hand, kicks in right away and, in most cases, does not accrue interest when it is operative. For example, federal student loans are deferred until you graduate or otherwise stop attending school.

Here is a chart that identifies some of the key differences between deferment and forbearance in the case of student loans:

Choosing between forbearance and deferment can be confusing. So, first, consider your financial situation. Deferment may be the smarter path, since it keeps interest from snowballing. However, if you need help in the short term, forbearance can be a quicker and easier option.

Put on your thinking cap: Do you require a lasting solution or a short-term fix? Deferment could be an option to explore if you have certain types of debt and they always seem to weigh you down. Conversely, forbearance may suit you better if you expect things to look up before too long.

If you’re feeling the squeeze, you’ll be glad to know forbearance isn’t just for one type of loan — it covers a range of borrowing options.

Student Loans

Forbearance is like the life raft they throw to you when you’re drowning in a sea of student loans. It can allow you to stop paying for your loan or pay a reduced amount during bad times when you are facing anything from a job loss to other sudden expenses. 

But bear in mind that in forbearance, the interest on those student loans can keep growing like weeds in your lawn — even if you have a government-backed loan.

Deferment might be possible, especially for federal loans; however, if you don’t qualify, then forbearance is a suitable alternative. Just make sure you advise your loan servicer and get the paperwork lined up. 

They will need to see proof of the financial troubles you are facing before you can hit the brakes on those payments.

Mortgages

Mortgage forbearance is a godsend if you’re suffering from a shortage of money, maybe because of a lay-off, a medical crisis, or another emergency that blindsides you.

It will let you pause or reduce any payments for a spell, giving you a chance to stay in your home at a time when you are scrambling to get back on track.

Just remember, what you don’t pay now will still be waiting for you later. Make sure you understand the repayment terms and follow through on your end of the bargain.

Mortgage forbearance may tack missed payments onto the end of the loan or require you to make a lump-sum catch-up payment when forbearance ends.

Credit Cards

Credit card forbearance may be trickier to get, but some issuers make it available for cardholders who face hard times.

This type of forbearance can allow you to skip or reduce payments, but your interest will likely still accrue. That means you could end up paying more money over time. 

Credit card forbearance is often short-lived, lasting only a month or two. If you go down this road, check the fine print and do your research.

Your credit card issuer could decide to close your account or impose a higher APR when you return to regular payments.

You can explore other options if forbearance doesn’t sit right with you. Here are a few that could make more sense — especially if you think the changes in your financial situation may last longer than a few months.

Loan Modification

You can request a loan modification to make it more manageable. You may get a lower interest rate or longer repayment period — enough to give you a little more breathing room. The process isn’t exactly speedy, but it can be an answer to your prayers when your purse strings are tight.

You’ll have to spend some time with your lender to qualify for a loan modification. They will want proof of your hardship, so be prepared to deliver documents such as pay stubs and tax returns. 

But the good thing is that your monthly payments will likely be much more affordable if you get approved.

Refinancing a Loan

Refinancing is the equivalent of trading in an old mule for one that’s faster and eats less hay.

The process may allow you to replace your present loan with another loan at a lower interest rate or a smaller monthly payment amount to free up some of your cash flow. This makes this debt a little less like the proverbial ball and a chain.

Now, remember, refinancing is most commonly done with mortgages, and comes with its own set of hoops to jump through. Most times, you’ll need a decent credit score for good terms, and there are possible fees like appraisal costs or closing charges. However, if the numbers work in your favor, it can be a way to save financial headaches in the long run.

Debt Management Plans

If your debt is spread out like a prairie fire, a DMP can help round it up and get it under control. You work with a credit counselor or financial advisor to get your finances into shape. They can even help you negotiate with creditors to make the terms and monthly payments easier to swallow. 

A DMP is no free ride. You must pay heed to your budget and commit to it for multiple years. But if you’re searching for a way to get out of debt and get a handle on your finances, this is a solid option.

There’s no doubt that forbearance can help you out of a tight situation, even if it’s just for a little while. But you shouldn’t automatically take any forbearance offer you receive. I advise you to check out the details first and make sure it’s a deal you can live with.

That means you have to weigh the pros and cons before making the leap.

Other options may be a better fit for your unique circumstances, so it makes sense to review all of your alternatives, including one we haven’t mentioned: filing for bankruptcy. Many people do so every year, so it deserves some consideration, even though it should be a last resort. Bankruptcy will ruin your credit for years and take a long time to recover from.

If you hitch your wagon to the forbearance horse, you better know what to do when it’s time to dismount. That means coming up with a plan to pay back what you owe, plus any additional interest that piled up. Failure to create a long-term solution will put you in a worse financial condition than before, possibly leaving bankruptcy as the only option.