A loan deferment or forbearance will allow you to postpone or reduce your loan payments. We will discuss the difference between these two loan situations so you can make a smart financial decision.
Life can throw all sorts of unexpected situations at you, making it difficult to pay on pre-existing loans. When you get behind on bills, this can be an extremely stressful financial situation for you and your family. However, some programs can help you get back on your feet and minimize the financial damage loans have on you during tough times.
Loan deferment and forbearance plans can temporarily help you stop or minimize your loan payments. The difference between these two loan situations is that a deferment will not acquire interest, and a loan forbearance will acquire interest.
Interest rates can make a massive difference in how long you will pay off alone and if you can recover from your financial setback. However, there are financial situations where forbearance is more appropriate than a deferment and vice versa. We will discuss these different financial situations so you can determine what the best move is for you.
Forbearance vs. Deferment Student Loans
Student loans are the main situation where you might face a loan deferment or forbearance. Several requirements come along when you get a deferment for a student loan. On the other hand, forbearance plans are significantly easier to get but harder on you later because you still accumulate interest.
How to Get a Student Loan Deferment
You must consult your financial institution to understand their requirements for a student loan deferment. Every financial institution will have different rules surrounding this loan forgiveness plan and different definitions of this plan. However, the following are a few circumstances you could find yourself in that would allow you to qualify for a student loan detriment with your financial institution.
- Most financial institutions will likely approve active-duty military personnel for a deferment plan.
- You might be eligible for a deferment plan
- if you're enrolled in an improved school program while paying off your student loan debt. However, you must consult your school's guidance counselors and financial institutions to determine if your enrolled programs qualify.
- If you're disabled and participate in specific rehabilitation programs, you could qualify for a deferment plan. However, not all rehabilitations qualify.
These are not the only circumstances in which your financial institution could approve your student loan deferment. However, the examples above are the most common situations that get approved for a student loan deferment.
How to Get a Student Loan Forbearance
If you cannot get a deferment plan, you should see if your financial institution will approve a forbearance instead. It would be ideal for you to have a deferment instead of a forbearance but not every situation allows you to do that. The massive downside to having a student loan forbearance is that you will still pay interest.
However, it would be better to have a student loan forbearance than to default on your student loans. Working with your financial institution to get yourself back on track by any means necessary is the best way to ensure that you have financial success in the future. Otherwise, you could find yourself falling into a hole of debt that you can't escape.
Plus, neglecting to work out a situation with your bank could severely damage your credit score and cause financial institutions to refuse to give you loans in the future. There are situations where financial institutions could still deny you a student loan forbearance. Always discuss your options with your bank when you cannot repay your loans to give yourself the best outcome.
Forbearance Vs. Deferment Mortgage
Another reason people need a forbearance or deferment would be lapsing on mortgage payments. If you cannot make mortgage payments, you risk losing your house, which is a stressful situation for everybody. If you can discuss a forbearance or deferment mortgage plan with your financial institution, you could save yourself from losing your home.
What to Do When You Can't Make Mortgage Payments
Always discuss your options with your bank when you cannot pay the bills on your loans. It would be best if you asked your financial institution about your qualifications for a deferment mortgage before asking about a forbearance. If you successfully get a mortgage deferment, you won't risk additional interest payments towards the end of your loan that could extend it.
When you get a deferral on your mortgage, you set aside payments to get yourself caught up in life. However, when you stop paying your mortgage payments and don't talk with your financial institution about your situation, your financial institution will eventually kick you out of your house and take it away. This situation will also destroy your credit for years and make it difficult to get any future loans or rent a place.
How to Get a Mortgage Forbearance
If your financial institution denies your request for a deferment mortgage, you should inquire about a forbearance instead. The downside is you'll pay for a few more years on your mortgage payments when you choose a forbearance plan. But on the other hand, your forbearance plan will allow you to postpone or minimize your current mortgage payments and tell you a time determined by your financial institution and yourself.
The best way to guarantee your chances of setting up an alternative loan payment plan is to let your financial institution know you need help as soon as you start missing payments. If you miss too many payments before discussing your situation with your lender, there is a strong chance they won't give you either option.
What is Federal Forbearance Vs. Deferment
The federal government offers loans to people who qualify for financial aid while going to school. The difference between a federal student loan and the Student Loans discussed above is one comes from the government, and the other comes from a financial institution. Also, with private and federal student loans, you can get a forbearance or detriment to help you during hard times.
If you have a federal student loan, you still need to contact the institution that the loan goes through to determine if they will grant you a forbearance or deferment. Federal forbearance may be more common than private student loans because you already qualify for financial aid if you have a federal student loan. Typically, students who qualify for financial aid receive more leniency regarding financial troubles.
What to Do If Your Loan Doesn't Qualify for Forbearance or Deferment
Unfortunately, there are some situations where your lender could deny you a forbearance or a deferment on your loan. For example, your lender might deny you because you waited too long to talk to your lender about missing payments or you've had too many situations where you needed a forbearance or deferment on a loan already. When this happens, it could leave you feeling helpless but don't worry because there are other avenues you can take to get yourself back on track.
Talk to your lender or bank and discuss your options and situation to see how you can resolve things. Communication can greatly affect how your financial future turns out after this hardship.
If possible, pay a minimum balance on your loan that's behind to show your financial institution that you are dedicated to improving the situation. Discuss with them before doing this.
If you're in a situation where you know you can't make your payments and know your loan will default, especially mortgage loans, you might have to file for bankruptcy. Filing for bankruptcy could allow you to keep some of your assets, although it comes with massive risk, so always do this only when you're out of other options.
It can be extremely difficult to recover from financial hardship, especially with pre-existing loans. No one can foresee life circumstances that could get them into a troubling situation, but when that happens, you need to try to make the most of it. Ignoring your problems won't make them go away, and it will only make your situation worse, so always keep open communication with your bank when you can't pay your loans.
If you can get a deferment plan, you should go for it so that you don't have to pay extra interest when your loans return to normal. However, if a financial institution or lender says you don't qualify for a deferment plan, you should ask about a forbearance plan. Both situations will postpone or minimize your loan payments so that you can deal with your financial hardship.
If you cannot make payments on your loan, the most important thing to remember is to talk with your lender or your financial institution. If you ignore the situation, you can face financial problems for years. On the other hand, talking about your problems with your lender as soon as possible helps you make the most out of a bad situation, and your lender will be more likely to help you.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.