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What you need to know about loan forbearance during COVID-19

This financial hardship program provides temporary relief – but for a price.

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As federal assistance runs out for the millions of Americans who got laid off, you might be thinking of ways to cut back. Putting loans into forbearance can help you avoid default by pausing repayments.

But your monthly bill will be higher when repayments resume in most cases. And it might not be available on all loans, since many lenders are opting to offer deferment instead.

What is forbearance?

Forbearance is a loan repayment assistance program that lets you pause repayments when you have a temporary financial hardship that makes it difficult to make repayments. It's meant to helps you avoid defaulting on your loan in short-term situations, like if you lose your job or are in an accident.

How long does it last?

In most situations, forbearance lasts around three months, but it can go as long a a few years. This depends on the lender, the type of loan you have and your financial situation.

Does it affect the cost of my loan?

Yes, forbearance typically makes your loan more expensive. During forbearance, interest continues to add up on your loan. That interest is added to your loan balance in a process called interest capitalization. Unlike with deferment, most lenders don't extend your loan term when you go into forbearance.

This all means that you'll have a higher balance and higher monthly repayments when you come out of forbearance. That's why it's not a good solution for long-term or indefinite financial hardship.

What happens when I put my loans in forbearance?

Across the board, lenders are offering both forbearance and deferment on loans to borrowers struggling during the coronavirus. But how it works varies depends on the type of loan you have.

Personal loans

Most personal loan providers are offering deferment to borrowers affected by the coronavirus outbreak, rather than forbearance. That's because deferment gives borrowers slightly lower repayments once the hardship program ends. Typically deferment and forbearance last for around three months on personal loans.

The only time you might want to consider forbearance on a personal loan is if you don't meet your lender's deferment criteria. For example, some personal loan providers require proof that you lost your job. If you still have your job but just got hit with high medical bills that you're struggling to pay, your lender might allow you to put your loan into forbearance.

Business loans

Like with personal loan providers, most business lenders are offering deferment rather than forbearance to companies affected by COVID-19. But there's one exception: commercial real estate loans — or mortgages.

Businesses with commercial real estate can ask their bank for a forbearance agreement. Avoid foreclosure with this option when you can't make repayments. Often, commercial real estate loan agreements have a forbearance clause, which outlines how it works and what the requirements are under normal circumstances.

But even if you don't meet those requirements, most lenders are offering coronavirus forbearance — which could potentially be extended as states start to shut down again. Typically this is available on a case-by-case basis.

Car loans

Forbearance is rare for auto loans. Most lenders offer deferred payments, waiving late fees and providing lease extensions to borrowers who are struggling with repayments. But like with personal loans, you could request regular hardship forbearance if you don't meet a lender's requirements for coronavirus deferment.

Student loans

The CARES Act put all federal student loans into automatic forbearance between March 13, 2020 and September 30, 2020. And the government isn't charging interest during this time, so it won't make your loans more expensive.

Many private lenders are also offering hardship forbearance to borrowers who have been affected by the coronavirus. You can find out what's available to you by contacting your student loan servicer.

With student loans, the difference between deferment and forbearance is less severe than other types of debt because you can extend your repayment plan. Read our guide to student loan deferment and forbearance to learn how it works.

Mortgages

The CARES Act made it easier to apply for forbearance on federally-backed mortgages. Even if you've already missed a payment, you can apply for 180 days of forbearance. And once that is up, you have the option to apply for another 180 day extension.

Many private mortgage providers are also offering forbearance programs to customers, sometimes for as long as six months. Some are also offering deferment to customers affected by COVID-19. Deferment is rarely an option on mortgages and is generally a better deal — but some lenders are making an exception during the coronavirus outbreak.

But think about it twice before you apply for forbearance. Interest will continue to build, which will make your mortgage more expensive. And while forbearance due to the coronavirus outbreak can't be negatively reported to credit bureaus under the CARES Act, you may still want to look into other options first.

How much will forbearance cost me?

If you qualify for forbearance without interest — like federal student loan borrowers — it won’t cost you anything. But if your lender is charging interest, calculate the cost of forbearance by following these steps:

  1. Divide your annual percentage rate (APR) by 365 to get the your daily interest rate.
  2. Multiply your daily interest rate by your loan balance.
  3. Multiply your result from step 2 by the number of days your loan will be in forbearance. This gives you the amount of interest that will add up during forbearance.
  4. Add the result from step 3 to your loan balance. This gives your loan plus capitalized interest.
  5. Enter your new balance from step 4, the APR and the term you'll have left after forbearance into the monthly repayment calculator.
  6. Add the result from step 3 to the total interest cost of your new loan. That is how much your loan will cost in total after forbearance.

What to see how much you can save by avoiding forbearance? Enter your current loan details to see the difference in the monthly and total interest cost.

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How do I qualify for forbearance?

Generally, you must face some kind of hardship to qualify for forbearance. You can usually qualify for forbearance in the following situations.

  • Financial hardship. This covers disruptions to your income, like losing your job, having a business that fails or getting an expensive medical bill.
  • Medical hardship. If you lose income because you're caring for someone who fell ill or otherwise needs medical treatment, this could qualify as hardship.
  • Disasters. Most lenders offer forbearance if you're in a designated disaster area. This covers natural disasters, like a hurricane or global pandemic, as well as man-made disasters like a terror attack.
  • Active military duty. Generally you can qualify for forbearance if you're called to active duty. It typically lasts the length of your assignment.
  • Going back to school. Though generally only available on private student loans, you could qualify for forbearance while you're enrolled.
  • Separation from a coborrower. Some lenders might allow you to apply for forbearance if you don't share finances with a coborrower and are in the process of dividing up assets.
  • Death of a coborrower. You can typically put your loans into forbearance if you shared repayments with a coborrower who died — though you might want to refinance.

Deferment could be available in many of these situations, depending on the type of loan and lender. Since deferment is generally less expensive, ask about that option first.

How to apply for forbearance on a loan

If it's an option, ask about deferment first before considering forbearance. During the coronavirus outbreak, the best way to do this is to log on to your online account and read about your options. Most lenders have a coronavirus assistance page where it breaks down what you can and can't do and instructions on how to apply online.

Hardship assistance may be on a case-by-case basis — if so, reach out to customer support by sending an email or using live chat. Phone lines are typically busier than usual and it might be difficult to get ahold of a representative.

Often you're required to submit documents proving your hardship and showing that you don't have the assets to cover loan repayments. This can include bank account statements, statements from other loans or credit cards and utility bills. But in some cases, you might not need to provide documentation during the coronavirus outbreak.

What about automatic forbearance?

With student loans, you might not have to apply for forbearance at all. For example, the federal government put all students loans into automatic forbearance as part of the CARES Act. Your loans also might go into forbearance when you apply for discharge, forgiveness, federal loan consolidation or otherwise change your repayment plan.

However, automatic forbearance is uncommon on other types of loans. But it's become slightly more common during the coronavirus outbreak. Think your loan might be in forbearance? Always double-check with your lender before you stop making repayments to avoid accidentally missing a payment.

How does forbearance affect my credit?

During the coronavirus outbreak, the majority of creditors aren't reporting accounts that are in forbearance to credit bureaus. But under normal circumstances, it might. In this case, it would show up on your report as a delinquency, since you're technically missing repayments. This would lower your credit score and be visible to anyone who checked your credit as long as that account was on your credit history.

Usually you can find out if your lender plans on reporting forbearance in your forbearance agreement.

How else can I pause or lower repayments?

Forbearance is only helpful as a temporary solution — and it's not the cheapest one. You also might want to consider the following options before you apply.

  • Deferment. Gives you more slack on your monthly repayments and can be more affordable in the long run — though the slightly longer term means you will pay more in interest.
  • Look into coronavirus debt relief. Some local governments and private organizations are working to provide payment assistance to people who have been affected by the coronavirus outbreak. Your local government website or mutual aid organization can be a good place to look.
  • Ask for a longer term. When your financial situation has changed permanently — or at least indefinitely — a longer loan term can lower your monthly cost to a level that is more affordable.
  • Consolidate your debts. Debt consolidation involves taking out a new loan with terms that better fit your new financial situation. This could be a good option if you've lost a coborrower but otherwise your personal finances are the same. But you generally won't qualify if you're unemployed.

All of these options might help. But the first step you should take if you think you're going to miss a repayment is contact your lender. They can walk you through the options.

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Bottom line

Forbearance can be a helpful tool for when you have a temporary setback — like many Americans have during the coronavirus outbreak. But it will ultimately make your loan more expensive in both the short- and long-term. You can read about other options available to you by visiting our guide to financial assistance available during COVID-19.

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