When people talk about loan forbearance or deferment, often they’re talking about student loans. But forbearance — where a lender agrees to temporarily reduce your loan payments or even allow you to stop making payments altogether — is an option for some personal loans, too.
For people who have fallen behind, or are about to, on a personal loan like a mortgage, a car loan or a home equity loan, a lender may be willing to grant a forbearance.
How does forbearance work?
First, you’ll need to reach out to your lender to ask about forbearance. Lenders will have their own criteria for deciding to grant a forbearance, but generally, you’ll have to show that something has changed with your financial situation to make keeping up with your loan payments tough. That could be a job loss or a medical emergency.
Your lender will decide the terms of the forbearance, including how long it lasts (it could be as short as three months or as long as 12 months or beyond) and how your payments will be affected. Maybe the lender will temporarily lower your interest rate, the overall amount you need to pay each month, or allow you to stop making payments altogether for a set period.
Forbearance and interest
The tricky thing about forbearance is that you’re still responsible for the interest on your loan even if you’re not making payments. If you can, you absolutely should continue paying the interest on your loan during the forbearance period. Otherwise, the interest will be tacked onto the principal loan balance once your forbearance period ends, ballooning how much you owe.
Forbearance is best for temporary financial issues. It’s not meant as a solution for long-term financial problems, but as a short-term reprieve until your financial situation improves.
Is forbearance a good idea?
If you expect your finances to rebound in the near future and you haven’t dug yourself too deep into a debt hole, forbearance could be a good option.
“If you need a reprieve, and it helps you not get a ding on your credit, or that you’re late or in default, it can be worthwhile,” says Michael Bovee, co-founder of debt relief company, Resolve.
But, Bovee cautions, don’t forget that a forbearance won’t last forever. You also could wind up paying more in interest over the life of the loan because of it. If you feel confident you will bounce back financially, it can be a good way to fend off foreclosure or to prevent major damage to your credit score.
In some cases, long-term relief might make much more sense. One option is a loan modification, where your lender agrees to permanently change the terms of your loan. For example, a lender might agree to reduce your interest rate, extend the term length of your loan, or change your loan from one with a variable interest rate to one with a fixed interest rate. Among the things you’ll need to be approved is that you’ll have to show hardship (why you can’t pay the loan as it is now), and also show that you would be able to make the loan payments with more favorable terms.
You could also consider refinancing your loan, but that will likely mean you’ll need solid income and a good credit score.
At the end of the day, if you decide to ask for a forbearance, it should be because you think it can be a bridge to a time in the near future when your finances will be in better shape and you can afford to make your loan payments again.