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Understanding Forbearance: A Comprehensive Guide
In this article:
- What Is Forbearance?
- Types of Forbearance
- Forbearance vs. Deferment
- How Does Forbearance Affect Your Credit?
- How Long Does Forbearance Stay on Your Credit Report?
What Is Forbearance?
Forbearance is a temporary reduction or suspension of loan payments due to financial hardship. It is typically offered at the lender’s discretion, except for federal student loans, which may qualify for automatic forbearance under certain conditions.
Forbearance is:
- Temporary: Usually lasts no more than 12 months, though extensions may be possible under extraordinary circumstances.
- Subject to repayment: Missed payments must be repaid, either as a lump sum, added installments, or extended loan terms, often with additional interest.
- Requested by the borrower: Lenders require a formal request and evidence of financial hardship to grant forbearance.
Types of Forbearance
Forbearance may be available for various types of credit:
- Mortgage loans: Granted to avoid foreclosure, typically for borrowers with good credit and short-term financial hardship.
- Credit cards: Hardship programs may include payment suspension, APR reduction, or late fee forgiveness, but are not universally available.
- Student loans: Federal loans offer mandatory forbearance under specific conditions, while private loans may have more stringent requirements.
- Auto loans: Usually involve payment deferment, with interest continuing to accrue.
- Personal loans: Forbearance often means deferment, with eligibility depending on the lender and proof of financial difficulty.
Forbearance vs. Deferment
While both forbearance and deferment provide payment relief, they differ in key ways:
| Forbearance | Deferment |
|---|---|
| Available for federal student loans, mortgages, and credit cards | Available for federal student loans, auto loans, and personal loans |
| Payments are paused or reduced | Payments are paused or reduced |
| Interest accrues | Interest accrues, except for certain federal student loans |
| Repayment of excused payments is due at the end of the relief period | Skipped payments are added to the end of the loan term |
| Duration up to 48 months, often up to 12 months | Duration up to 36 months |
How Does Forbearance Affect Your Credit?
Adhering to the terms of a forbearance agreement generally keeps your credit scores intact. However, the impact can vary based on your current credit status, other debts, and how the lender reports to credit bureaus.
Student Loan Forbearance
Federal student loans in forbearance remain in good standing on credit reports, provided eligibility requirements and payment schedules are met. Private student loans may have different terms.
Mortgage Forbearance
Complying with a mortgage forbearance agreement keeps your account in good standing. However, lenders may note the forbearance on your credit report, which could influence other lenders’ evaluations.
Credit Card Forbearance
Following the terms of a credit card forbearance agreement typically prevents negative credit report entries. However, increased balances due to accruing interest can affect your credit utilization rate.
Personal Loan Forbearance
Personal loan forbearance, often referred to as deferment, involves skipping payments that are added to the end of the loan term. Maintaining payments post-deferment keeps the loan in good standing.
How Long Does Forbearance Stay on Your Credit Report?
If you adhere to the forbearance agreement, your account remains in good standing, and your credit scores should not be affected. Forbearance notations on credit reports are not considered negative information and can remain as long as the account is open.
The Bottom Line
Forbearance can provide crucial relief during financial hardship. To protect your credit scores, resume regular payments as soon as forbearance ends and adhere to the repayment schedule. If you’re concerned about the impact on your credit, monitoring your FICO® Score from Experian can help you stay informed.
For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with confidence.
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