One of the scariest things about having debt is the fact that you might not be able to make your payments at some point. What would you do if you lost your job, or if a medical condition put a strain on your budget? How would you be able to make your loan payments?
When you face financial hardship, one of your options might be forbearance. If you can work out a forbearance agreement, you can gain a little breathing room to get back on your feet.
What is forbearance?
Forbearance is the postponement of loan payments. Depending on the type of loan and the lender, forbearance can take different forms.
In some cases, you might be able to suspend all or part of your loan payment for a set period. A lender might also require you to pay interest without making principal payments for an agreed-upon time frame, allowing you some breathing room in your budget without continuing to rack up interest.
It’s important to understand, though, that forbearance doesn’t usually reduce the total amount that you owe. Instead, the missed payments are likely to be added to the end of the original loan term, lengthening the amount of time you have the loan.
How do you obtain forbearance?
You must speak with your lender or your loan servicer if you feel like you need forbearance. In many cases, it’s necessary to prove your financial hardship before your creditor will work out a deal. However, by talking to your lender or loan servicer before things get too bad, it’s possible for you to pause your payments for a time.
Forbearance can last anywhere from one month to a year, depending on your lender’s policies and other factors. With some loans, a good payment history is vital if you want to increase your chances of being approved for forbearance.
Federal student loans
When you run into trouble paying your federal student loans, you can pause your payments for up to 12 months at a time. Your loan servicer will work with you to determine whether it makes sense to grant your request. Reasons to ask for forbearance include financial difficulties, a change in employment, or medical costs.
In some cases, your federal student loan servicer is required to grant forbearance. These include:
- You’re serving a dental or medical internship and have an eligible loan.
- You’re serving in AmeriCorps and have an eligible loan.
- You’re activated as a member of the National Guard but don’t meet the requirements for military deferment.
- You are teaching in a capacity that could qualify you for teacher loan forgiveness.
- Your monthly payments for all student loans have been at least 20 percent of your gross monthly income for up to three years.
Before you decide to ask about federal student loan forbearance, however, it might make sense to see if you qualify for deferment. Deferment is similar to forbearance, except that you can get a break on interest charges when you have subsidized loans. When you’re in forbearance, interest still accrues on your loan, even if it’s subsidized.
Similarly, you might be better off getting on an income-driven repayment (IDR) plan instead of asking for forbearance. With IDR, your payments are capped, making them manageable. Plus, if your income is low enough, your IDR payment might be close to zero, making it very easy to stay up-to-date on payments.
Carefully weigh your options before you take action, and determine what is most likely to benefit you in the long run.
Private student loans
Because private loans aren’t part of the federal student loan program, private lenders don’t have to grant you forbearance. Double-check to see if your lender offers a hardship program.
Access to forbearance is one of the things to consider before you refinance your federal loans to private loans. You might lose your ability to obtain forbearance when you do so.
Auto loans
If you are worried about losing your car because you can’t make your payments, call your lender. There’s a good chance they will let you skip payments for a month or two if you run into temporary money problems.
If you think your issues might be of a longer duration, you might need to talk to your lender about other options for your car loan. If you can’t afford to lose the use of your vehicle, long-term solutions like refinancing, or trading in your car and downgrading, might help you avoid repossession if you can no longer make your payments.
Mortgages
Rather than foreclose on your property, a mortgage lender might grant you a forbearance if you’re having trouble meeting your obligations on a temporary basis. The terms of your mortgage forbearance depend on your lender or servicer, and whether or not there’s a good chance you can get back on track with your payments within a relatively short period.
If you think you will experience a longer-term problem with your mortgage, it can make sense to see if you might be eligible for some degree of mortgage forgiveness. This can reduce the amount you owe, making the situation more manageable.
You might also be possible to qualify for mortgage modification, in which your terms can be changed to lower your interest rate or extend your loan term permanently. This can lead to a lower monthly payment, although you probably won’t see your payments suspended altogether.
Credit cards
When you struggle to pay credit cards, you might be able to obtain forbearance for a few months. With forbearance, you may be able to avoid having your credit card canceled (which can often happen under a debt-management program), attempt a credit card settlement or modification, or use a workout arrangement. With these types of programs, a credit card issuer often lowers your interest rate or sets up a payment plan that allows you to repay less than you owe. However, this makes it difficult for you to obtain another credit card in the near future.
On the other hand, if you expect to have longer-term trouble making payments, it might make sense to come to a different arrangement with your card issuer, even if it means your account is closed. Consider, though, that settlements and workout arrangements can lead to lower credit scores.
Know your options when you can’t pay your debt
Understanding your options is important if you’re having difficulty paying off your debt.
If you know your problems will only last a few months, forbearance can make sense. It gives you a chance to stabilize your situation and reduce your money-related stress. But if it looks like it might take longer to resolve your financial issues, you may have to consider other solutions.
No matter the situation, though, you should speak with your lender or servicer to review your options and work out a plan that is likely to offer you the best chance of helping you move forward.
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