When most people take out loans, they don’t think they’ll have trouble repaying them later. Unfortunately, circumstances can change. And when they do, they sometimes cause major financial problems. Forbearance may help you get back on your feet. But what does loan forbearance mean? And what is a loan forbearance for?
What Does Loan Forbearance Mean?
What is loan forbearance, and how does it work? Loan forbearance is a temporary pause in payments due to financial issues. For instance, if you lose your job or are dealing with major medical issues, you might ask your lender for forbearance.
But what does forbearance mean on a loan? Each lender has its own forbearance requirements, but here’s a general look at how it works:
- You contact the loan servicer to ask or apply for forbearance
- If approved, you pause payments (or pay a reduced amount)
- Interest usually keeps accruing on the loan
- Once the forbearance period ends, you start making payments again
- You repay missed payments (and any accrued interest) over time
Forbearance periods vary between lenders. Most mortgage lenders offer forbearance periods of three to six months. If you have federal student loans, forbearance can last up to 12 months at a time, and you can’t spend more than three years in forbearance.
If you’re having trouble making payments and are interested in loan forbearance, make sure your lender offers it first. Forbearance is commonly available for mortgages and student loans. Some personal and auto loan lenders may offer it, too.
What Happens When Your Loans Are in Forbearance?
Before you request forbearance, it’s important to have a clear sense of what you’re getting into. What does it mean when a loan is in forbearance?
You might be able to pause payments in forbearance, but that doesn’t mean your loan becomes frozen in time. Interest usually keeps piling up, and your repayment schedule might change.
What Happens to Interest During Loan Forbearance?
In most cases, interest on your loan will continue to accrue during forbearance. That interest may be capitalized (added to your loan balance) when you start making payments again. You’ll effectively end up paying interest on interest.
If you’re able, you might consider making interest-only payments during the forbearance period. That way, you won’t have to worry about capitalized interest later.
How Does Loan Forbearance Affect Repayment Schedules?
It’s important to remember that loan forbearance isn’t loan forgiveness. Once the forbearance period ends, you’ll need to repay the missed amounts. That means your total payment timeline is extended. In some cases, your monthly payments might be slightly higher as well.
Can You Negotiate Loan Forbearance With Your Lender?
You can usually negotiate forbearance with your lender. Here are a few tips that might help:
- Get in touch as soon as you think you might miss a payment
- Be ready to provide documentation of financial hardship
- Get any agreement in writing
If your lender doesn’t have a clear forbearance protocol, you may be able to negotiate the terms of your forbearance. You might need to discuss how many payments you’ll miss, whether interest will accrue, and how you’ll make up those payments once forbearance ends.
Why Are Your Loans in Forbearance When You Didn’t Request It?
If your loans are in forbearance and you didn’t request it, don’t panic. This probably means they’re in “administrative forbearance.” During administrative forbearance, the lender pauses repayments because of servicer transfers, delays, or system glitches.
Your lender should tell you if your loan is in administrative forbearance. If you haven’t gotten any kind of notification, contact them to check what’s happening.
Pros and Cons of Loan Forbearance
Is forbearance good or bad? That depends. It can give you much-needed relief while you improve your finances. It can also result in you paying more over time.
Before you ask for forbearance, it’s a good idea to consider the pros and cons. Here are a few advantages:
- It frees up money you can use to cover immediate obligations
- It helps protect you from credit damage (caused by falling behind)
- The time period is generally flexible
- Lenders often can’t charge late fees
What are the disadvantages of loan forbearance? You should consider these potential downsides as well:
- Interest usually continues to accrue
- Interest usually capitalizes (gets added to your loan balance) when you restart payments
- Your future loan payments could be higher
Keep in mind that many lenders limit your forbearance period. You can typically pause payments for several months, but some lenders may give you more time.
Is Forbearance Right for You?
If you’re having trouble repaying a student loan, mortgage, or other kind of loan, answering the question, “What does loan forbearance mean?” is an essential first step.
Forbearance can help you get through hard times, but it’s not a financial cure-all. When you take the time to understand forbearance and other options, you’ll be better equipped to manage your debt.
