If you’re a homeowner or have a student loan in your name, there’s a good chance that your lender has reached out to inform you of the options they’re offering in the wake of the coronavirus pandemic for forbearance or deferment.
Here’s What You Need to Know About Forbearance vs. Deferment
Both forbearance and deferment can help you press pause on payments to creditors when you’re financially struggling. But there are some differences between the two.
What Is a Deferment?
Deferment is basically coming to an agreement with your creditor to freeze payments for a period of time. The money you don’t fork out during the payment holiday is then added to the end of your loan.
So let’s say you do a 90-day deferment on your mortgage, which is an option many lenders are offering right now. That means you won’t have to pay anything toward your mortgage for the next three months. But the life of your loan will extend by three months on the back end.
The favorable thing about deferment is that additional interest and fees don’t accrue during the payment holiday, according to Experian.
What Is a Forbearance?
Forbearance is an agreement you come to with your lender where the lender agrees to accept reduced payments or no payments at all for a certain period of time.
When that period ends, the borrower restarts with regularly scheduled payments. You must also pay the amount you didn’t pay during your payment holiday.
According to Experian, you can either do that as a lump sum or in monthly installments over 12 months. If you choose the latter option, the “catch up” payments are in addition to your regular monthly payment.
Unlike deferment, a forbearance involves the possibility of interest and fees being tacked on.
What Types of Loans Might Offer a Deferment or Forbearance?
As a general rule, you’re most likely to encounter the option to do a deferment or a forbearance with your mortgage lender or your student loan lender. Credit card issuers may offer deferment or forbearance options, as well.
Chances are you’ve already been contacted by your lender about deferment or forbearance if you have these kinds of loans.
How Does a Deferment Impact Your Credit?
If you enter into deferment, your credit report will reflect that agreement you’ve made with your creditor. However, it won’t be accompanied by any negative mark that harms your credit.
“When a lender approves your deferment request, it should report that your payments are currently deferred to the credit bureaus,” Experian notes. “While this appears on your credit report, the deferment mark won’t directly help or hurt your credit scores.”
How Does a Forbearance Impact Your Credit?
The way forbearance impacts your credit is a bit more nuanced, according to the latest from Experian.
- Student loan forbearance: The credit bureau says it “will neither hurt nor benefit your credit score.”
- Credit card forbearance: Experian reports it’s “possible, but unlikely, you’ll see any negative entries on your credit report” when agreeing to this.
- Mortgage forbearance: “Mortgage lenders have the right to report [missed payments] as such to the credit bureaus, but they’re not required to do so,” according to the credit bureau.
On the bright side, you won’t have to deal with the possibility of foreclosure when you’re in forbearance. That’s because inherent in mortgage forbearance is the understanding that you won’t be foreclosed on during this period.
We’re in uncharted territory with the coronavirus pandemic and the economic fallout it’s bringing to people’s lives.
Fortunately, lenders are prepared to assist people at this time. So ,no matter whether you’re having trouble paying your mortgage, student loan or credit card bill, you need to keep the lines of communication open and be willing to ask for help.
Once you explain that you’re struggling financially because you’ve been furloughed or are outright unemployed, your lender will guide you to the programs they’ve set up for deferment or forbearance. It all starts with you reaching out and speaking up.
Meanwhile, if you have additional questions about deferment or forbearance, consider reaching out to our Consumer Action Center.
While we can’t currently accept phone calls to our Consumer Action Center helpline, we can still answer your money questions! Visit clark.com/cac to submit your question and a Consumer Action Center volunteer will call you as soon as possible.