When borrowers face financial challenges and struggle to make loan payments, two common options that may offer temporary relief are forbearance and deferment. Although, both forbearance and deferment are similar in purpose but they work in different ways and have distinct implications.
Letting you understand the difference between the two is what we are going to explain in this article. Knowing full well about how forbearance is different from deferment can help you choose the most suitable option for your financial situation.
Knowing how each option works, who qualifies, and the long-term impact on loan balance and repayment terms is essential for making an informed decision during a time of financial hardship. So, let's dive into the details without much ado.
Loan Forbearance
Forbearance is a financial terms that means temporary delays of loan repayments granted to borrower by lenders. This gives borrowers more time to stabilize their finances and get back on track with regular repayments of the loans.
Forbearances are granted to borrowers under certain circumstances:
- During Financial Hardship
- Borrowers Lost Jobs or Income
- Natural Disaster that Affects Borrowers Home or Income.
However, it's important to note that Forbearance doesn't mean your loans are forgiven; it only gives you more time (a temporary pause) to recover from your losses without accumulating interests or hurting your credit rating.
Once you're able to regain your financial stands, you'll continue to repay your outstanding loans as scheduled. Meanwhile, for some lenders to grant you forbearances, they'll have you agree that your interest will continue to accumulate, which can increase the total amount owed once regular repayments resume.
In other words, Forbearances are negotiations of loan repayments extension between a lender and a borrower. Lenders are often willing to negotiate forbearance agreements because they usually bear the financial losses associated with foreclosures or loan defaults.
Loan Deferment
Loan Deferment is a type of Forbearance that allows borrowers to extend their loan repayment under certain conditions agreed upon with their lenders. During a deferment period, borrowers are not required to repay any loan.
However, for certain types of loans, interest may not accrue while the loan is deferred. The popular type of loans that are available for deferment or forbearance are federal students loans, mortgages, auto loans, personal Loans, business loans, and credit cards.
Differences Between Forbearance and Deferment
There's no different in Loan Forbearance and Loan Deferment. These terms are used for loan repayments that's undergoing temporary delays due to borrower's financial conditions as agreed upon by both lender and the borrower.
Both Deferment and Forbearance, in practice, serve the same core purpose: providing temporary stop to loan repayments during times of financial difficulty. Both allow borrowers to pause or reduce their payments for a set period, and neither option cancels the loan or the obligation to repay.
However, it's important to note that the way these terms are being used on your credit providers may differs. In some financial platforms, they call it "Loan Forbearance", some call it "Loan Deferment", while some call it "Loan Extension". Just know that anywhere you see any of these three terms, they're probably referring to a financial term of placing temporary delays to loan repayments.
