Definition
Forbearance and deferment are both types of loan repayment relief. Deferment is the temporary suspension of loan payments, often due to specific hardships like unemployment, disability, or returning to school, and during this period, interest usually does not accrue on subsidized loans. On the other hand, forbearance grants a pause or reduced payments on a loan for a limited period, but interest continues to accrive on all types of loans.
Key Takeaways
- Forbearance and Deferment both allow borrowers to temporarily pause their loan repayments. However, in forbearance, the interest continues to accrue and will be added to the balance of your loan, while in deferment, interest may not accrue on certain types of loans.
- Deferment is typically a better option for borrowers, especially for subsidized federal student loans and Perkins loans, as these do not accrue interest during deferment. Forbearance might make sense when you don’t qualify for deferment but still need short-term relief.
- Both forbearance and deferment are considered temporary solutions. While they can provide immediate relief, they will not help reduce the overall loan balance. Long term strategies may include income-driven repayment plans, loan consolidation, or loan forgiveness programs.
Importance
Understanding the finance terms “Forbearance” and “Deferment” is crucial, particularly when dealing with student loans or mortgages.
Both terms indicate temporary pauses or reductions in loan payments, but the conditions and consequences differ.
Deferment allows you to completely pause loan payments for a period, possibly without the accrual of interest, especially for subsidized loans.
In contrast, forbearance also allows you to suspend or reduce payments, but interest generally keeps accruing, which can increase the total loan cost in the long run.
Knowing the distinction between the two can aid borrowers in making informed decisions to manage their loans more effectively, impacting their long-term financial health.
Explanation
Forbearance and deferment are two financial terms primarily utilized in the context of loan repayment, particularly for student loans. Their primary function is to provide relief to borrowers who may be experiencing financial hardship, thus unable to maintain their scheduled loan payments. If approved for either deferment or forbearance, a borrower can temporarily postpone or reduce their loan repayments.
This enables individuals to find their footing again without facing the severe penalties or the stress that normally comes with defaulting on loan payments. While both forbearance and deferment serve similar purposes, they differ in certain aspects. Forbearance is typically a short-term solution, often used when one is facing a temporary financial issue, like job loss or medical problems.
The interest on the loan continues to accrue during forbearance period, which can increase the total debt owed. Deferment, on the other hand, can be a longer-term solution and in some cases, the interest might not accrue during the deferment period, depending on the type of loan. It is usually used when a borrower goes back to school, faces severe financial hardship, or qualifies under other specific circumstances.
Both these options offer a safety net to borrowers, allowing them to manage their loans in a more flexible manner when confronted with financial challenges.
Examples of Forbearance vs Deferment
Student Loans: One of the most common instances of forbearance and deferment is with student loans. Deferment is often used when a student is still in school or a graduate is in a graduate fellowship program. During this time, the borrower does not have to make payments and the government may even pay the interest on certain loans. Forbearance is used once the borrower has exited school but is facing financial hardship and needs temporary relief from loan payments. However, it’s important to note that during forbearance interest will continue to accrue.
Mortgage Payments: These are also subject to forbearance and deferment. For instance, during the COVID-19 pandemic, many homeowners were granted forbearance, which temporarily paused or reduced their monthly mortgage payments. However, it’s crucial to understand that the missed payments will still need to be repaid in the future. On the other hand, mortgage deferment allows homeowners to either reduce or halt payments for a specific period, and the deferred payments could be added at the end of the loan period.
Credit Card Debt: Customers who are struggling financially could also request forbearance or deferment on their credit card payments. A customer in this circumstance might be allowed to lower or suspend payments for a specific period (forbearance). However, interest will still accrue on the outstanding balance. In some rare cases, the credit card company might agree to a deferment where the debt repayment schedule is postponed, and the individual does not have to make payments except possibly for the minimum payment.
FAQ: Forbearance vs Deferment
What is forbearance?
Forbearance is a temporary postponement or reduction of your loan payments. This is arranged between you and your lender when you face financial hardship and cannot meet your repayment terms. However, interest will continue to accrue during the forbearance period.
What is deferment?
Deferment, like forbearance, is a period during which your loan payments are temporarily delayed. The key difference is that, for certain types of loans, the interest may not accrue during deferment. This is a common option for students who have taken out student loans and are still in school.
What are the key differences between forbearance and deferment?
The main difference between forbearance and deferment lies in the way interest is accumulated. During forbearance, interest continues to accumulate and is added to your loan balance. Conversely, with deferment, in some cases, you might not be responsible for paying the interest that accrues during the deferment period.
How can I apply for forbearance or deferment?
To apply for either forbearance or deferment, you need to contact your loan servicer. It is essential to keep making payments until you have been officially notified that your forbearance or deferment has been approved to avoid late penalties or defaults.
Which option suits me best: deferment or forbearance?
Determining whether deferment or forbearance is the best option for you will depend on your individual situation, the type of loan you have, and your long-term financial plan. You might want to consult with a financial advisor to help make the best decision.
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