When financial hardship strikes, it can seem like your bills come nipping at your heels all at once, looking for that monthly payment. These financial demands can be overwhelming, potentially compounding the stress the hardship has already caused.
Fortunately, some lenders are willing to help when you need it most with forbearance agreements.
What does forbearance mean? We cover that below. Plus, we’ll outline:
- When a person can file for forbearance
- If credit cards offer forbearance
- The pros and cons of forbearance
- And much more
What is forbearance?
Forbearance is when your lender or credit card company temporarily modifies your terms to help you during financial hardship. The modifications could include skipping monthly payments, lowering monthly payments, reducing interest rates, waiving late fees, increasing your credit limit and more.
Lenders agree to these modified terms with the promise not to report any agreed-upon skipped payments as missed payments to the credit bureaus. This agreement allows you to manage the financial hardship without damaging your credit score.
The key about forbearance is it’s temporary. As soon as the forbearance period is up, you must request to extend your forbearance or resume your original repayment plan. Forbearance is not loan forgiveness—you must still pay your debt in full. Also, keep in mind that the lender or credit card company may still charge full interest during the forbearance period. That means you may come out of forbearance owing a higher balance.
Failure to resume your originally agreed-upon repayment plan after the forbearance period ends can result in serious consequences, ranging from negative marks on your credit report to foreclosure.
When can I request forbearance?
There is no widespread rule to forbearance, except during times of nationwide financial hardship. The coronavirus pandemic is one example of the federal government stepping in. It passed the CARES Act, which made all federally backed mortgages eligible for coronavirus forbearance.
Federally backed mortgage programs include:
- Fannie Mae
- Freddie Mac
- Federal Housing Administration (FHA)
- United States Department of Agriculture (USDA)
- Veterans Affairs (VA)
The CARES Act also impacted federal student loan forbearance, as it temporarily lowered all federally backed student loan interest rates to 0%, stopped all student loan payments and ceased all collection activity on delinquent accounts.
As for non-government-backed mortgages and loans, the requirements to qualify for forbearance will vary by lender. Generally, the lender or loan servicer will want proof of the hardship and an agreement to return to the loan’s original terms within a set period.
Some lenders may also require you to request forbearance within a specific time frame of your hardship. For example, if a medical emergency caused your hardship, the lender may require you to file for forbearance within three months of your diagnosis.
Are credit cards eligible for forbearance?
There is no legal requirement for credit card issuers to offer forbearance options during financial hardship. However, credit card companies understand it is better to work with struggling borrowers than to start racking up fees they will likely never collect, so some may offer credit card hardship programs.
If you find yourself in a financial hardship, contact your credit card company as soon as possible, explain your situation and ask if it offers any forbearance plans to help you get through this rough patch. If the credit card company has forbearance options, the representative will present them.
When going through the forbearance options, make sure to ask about the ability to extend the forbearance in case the financial hardship goes on for an extended period.
What are the benefits of forbearance?
Forbearance can offer plenty of benefits to borrowers during financial difficulty. Here are some of these benefits.
Freeing up cash flow each month
Some lenders may allow you to temporarily skip monthly credit card, loan or mortgage payments. At the end of the forbearance period, the lender may request you pay all the skipped payments as a lump sum immediately or pay them over a set period. The lender may also simply add the missed payments to the end of the loan.
Some lenders may offer you reduced monthly payments too. Similarly, at the end of the forbearance agreement, the lender will request you pay all the unpaid portions of the payments in full immediately or pay them over a set period. The lender may also prefer to add the unpaid portions to the end of the loan.
These skipped or reduced payments could give you extra cash to pay for immediate needs including your utilities, gasoline, groceries and other necessities.
May reduce the accrued interest
Lenders and credit card companies can also help by lowering your interest rate. In some cases, they can bring it down to 0% during times of severe hardship.
This reduced interest rate could help lower your monthly payment. When offered in conjunction with skipped or reduced payments, this can lower or eliminate any interest you may otherwise accrue on the account.
For example, the CARES Act not only forced a payment freeze on all federally backed student loans, but it also lowered their interest to 0% so there is no increase in balance during the payment freeze.
Eliminating negative credit reporting
When you file for forbearance, your creditor agrees not to place any negative marks on your credit report due to the skipped or reduced payments. It also agrees not to start the foreclosure or repossession process as long as you stick to the forbearance terms.
Stopping collection calls
Collection calls are nerve-wracking at best and a nuisance at their worst, but creditors have the legal right to contact you to collect the unpaid debt, so long as they follow federal debt collection rules.
However, if the lender or credit card company agrees to your forbearance request, all collection attempts will stop, giving you a much-needed break from the frequent calls.
What are the drawbacks of forbearance?
Forbearance can offer a lot of breathing room during a financial hardship, but it isn’t without a few downsides.
Interest may still accrue
Depending on the payment deferral agreement you made, your account may still accrue interest charges. Read the forbearance terms carefully to see if the creditor will still apply the standard interest rate, a reduced rate or no interest at all.
For example, consider your credit card has 20% interest and a $10,000 balance on it when you enter a one-year forbearance that stops all monthly payments. Still, interest continues to accrue at the original 20% APR. During that period, you’ll have no payments, but your account balance will grow by $2,193.91, bringing your balance to $12,193.91 at the end of forbearance.
Lender may expect a lump-sum repayment
The CARES Act prevents federally backed mortgage loans from requiring a one-time lump-sum payment after forbearance. This rule doesn’t apply to private mortgages.
Read your forbearance terms carefully and check whether there is a lump-sum repayment requirement after the forbearance term. For example, if you have a $1,500 monthly mortgage payment and go on a six-month payment deferment, you could end up owing a $9,000 lump sum after the mortgage forbearance period ends.
If you leave this bill unpaid, it could result in a negative mark on your credit report or foreclosure.
Monthly payments may be higher after forbearance
Some lenders may offer to break the lump sum mentioned in the previous section down into smaller monthly payments for a set term. While this can help lessen the immediate financial blow, it could still result in a significant short-term monthly payment increase.
Loan term could be extended
Some lenders may offer you principal forbearance, which is a form of loan modification. In this case, the lender allows you to temporarily defer a portion of the principal balance, lowering your monthly payments.
The lender will then add that principal back into the loan later. Depending on the terms of the modification, this could increase the number of months it takes to repay the loan.
Another option is when the lender simply defers your payments and places them at the end of your term. While you still make the same number of payments, this extends the payoff date by the number of payments you deferred.
Alternatively, the lender may use a second loan to repay the missed payments, adding more time until your home is paid off.
How can forbearance hurt your credit history?
Forbearance has no immediate or direct impact on your credit score. However, this doesn’t mean you don’t have to take it seriously. Mismanaging forbearance could result in serious credit issues that will only compound once the forbearance period is over.
Here’s how forbearance could indirectly damage your credit.
Increased credit utilization
When your credit card issuer offers forbearance in the form of a reduced interest rate, some cardholders may see this as an opportunity to run up their balance at a lower rate.
There are two issues here.
First, running up your balance impacts your credit utilization ratio, which accounts for 30% of your credit score. This can result in quick and steep drops in your credit score.
Second, once the forbearance ends and your interest rate returns to normal, your monthly payment could increase significantly due to the higher balance.
Increased loan balances
Even if you no longer need the forbearance, it may seem like a good idea to let it expire on its own and enjoy the extra cash. Unfortunately, if your forbearance allows interest to accrue, this will continue to stack interest on your loan. This additional interest will increase your principal balance and could cause issues later.
Also, the increased loan balance may negatively impact your credit score.
Once you’re back to financial stability, you can limit these balance increases by contacting your lender and ending the forbearance early.
Forgetting to resume normal payments
Your lender will usually give you ample warning before your forbearance ends. The warning could be in the form of a simple billing statement or a formal letter. Either way, it’s your responsibility to resume payments once forbearance ends.
If you forget to resume payments, you could end up 30 or more days late and get a negative mark on your credit report. A late payment could have a significant negative impact on your credit score.
What does forbearance mean? Temporary financial relief
Forbearance comes down to three words: temporary financial relief. It allows you to modify or even skip debt payments during financial hardship. This means you’ll have more cash to put toward the bare necessities, including food, electricity and gasoline.
There’s more to forbearance than just skipping payments, though. You must also understand key aspects of this financial relief, including:
- When you can file for forbearance
- If credit cards offer forbearance
- The pros and cons of forbearance
- How forbearance could impact your credit history
We covered all these topics above to give you a firm understanding of how forbearance works.
If forbearance isn’t an option for you, the Tally line of credit1 could help you consolidate your credit cards into a lower-interest credit line, potentially reducing your payment. Tally can also manage all your monthly credit card payments, so you don’t have to fear missing a payment.
1To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) Will be between 7.9% to 25.9% per year, and will be based on your credit history. The APR will vary with the market based on the Prime Rate.