Can Forbearance Save You From Loan Default?

Major life events can affect your finances and your ability to pay your bills. Job loss, disability, death of a family member, or relocation can create temporary hardship and make it difficult to stay on top of all your expenses. One option for affording your bills during short-term financial hardship is forbearance.

Under forbearance, the lender agrees to lower or suspend your monthly payments for a specific period of time; six months or a year, for example.

While you’re on forbearance, your lender won’t penalize for making smaller payments, as long as you’re paying what was agreed. Your payments will continue to be reported on time and the lender won’t initiate any foreclosure or repossession actions. In some cases, forbearance can be retroactively applied to your account to clear up payments you have already missed.

Forbearance is a good option if you are unable to refinance your loan or if your hardship is only temporary. Once you apply for forbearance, the lender will decide whether you qualify based on your financial situation. If approved, you may be required to make smaller monthly payments or you may not be required to make any payments at all.

You must make any required monthly payments while you’re on forbearance. Missing a payment can lead to cancellation of your agreement and reinstatement of your regular monthly payments. Early termination of your forbearance agreement could also restart any foreclosure or repossession steps that had been taken prior to your agreement.

If your required payments aren’t high enough to cover the monthly interest payment, you may end up with a larger loan balance at the end of the forbearance period. This could lead to a larger monthly payment or an extended repayment period. Your lender may give you the option to catch up on the capitalized interest, that is, the unpaid interest that accrued during your forbearance period. If you can afford to pay the interest, either during forbearance or after it’s ended, you can avoid having a larger monthly payment or extended repayment period.

Keep in mind that forbearance is a short-term solution. Your lender may limit the number of months you can use forbearance over the lifetime of the loan. If you think your financial problems may last more than a few months, consider other options, like refinancing, consolidating, or choosing a different repayment period (with student loans).