Financial hardship makes paying debts like student and home loans challenging. Rather than defaulting on the loan, you may be able to request a forbearance.
Let's take a look at what forbearance is, when you should ask for it, and how long it lasts.
[Update]: If you're thinking about forbearance or deferment during the coronavirus outbreak, see our article on the difference between the two and the options some banks are giving mortgage holders.
What is forbearance?
Forbearance temporarily defers or reduces payments on a loan. For example, if your normal payment is $425 per month, the lender or servicer may offer you an option to stop payments for a few months or a year -- or let you pay $400 per month for a while instead.
In most forbearance plans, interest continues to accrue even if you're authorized to make no payments.
When should you ask for forbearance?
Forbearance is an option for people experiencing temporary financial hardship. This might be the loss of a job, the death of a spouse or secondary wage earner, a medical hardship, or an environmental disaster. In most cases, forbearance is for borrowers who haven't defaulted on their loan yet.
If you're already in default, there may be other options, like a modification, that will better suit your needs. If you're 270 days or more late on your loan, forbearance may not be an option.
If you're at risk of default or are unsure that you'll be able to make your next payment, call your lender or servicer immediately and ask what options are available. The lender or servicing company will ask you to complete a form that verifies your income, assets, and debts or liabilities. You'll also have to provide documentation to support your financial situation. If approved, you'll sign a forbearance plan that outlines the terms of the forbearance, whether interest continues to accrue or not, and the length of the plan.
A forbearance plan can negatively affect your credit score temporarily. However, it won't affect your score as much as delinquency or default would.