Debt can be a beneficial way to manage your finances as well as a potential source of problems. Investments such as a home mortgage or college education often leave borrowers with major financial commitments, and any financial hardship can make it difficult to pay back the loan. A forbearance, which is temporary permission from the lender to stop making payments, is one way to avoid default, but it can have unintended consequences.
Loan Types
If your lender grants you a forbearance, it will appear on your credit history. However, the way that a forbearance affects your credit score depends on the type of loan. For example, a forbearance on a mortgage loan has the same negative impact on your credit score as a 90-day late payment, according to the Bad Credit Advisor website. This may seriously impair your ability to borrow money in the near future, until your credit score improves. On the other hand, student loan forbearances still appear on your credit report, but they don't affect your three-digit credit score.
Benefits
With any type of loan, the key benefit of a forbearance is that it can protect your credit score by allowing you to avoid missing payments or submitting payments late. Even a single missed payment is enough for your lender to note your loan's status as in default. In most cases, the negative impact of defaulting on your loan is much greater than the impact of a forbearance. A forbearance also gives you time to save for future payments and get your finances in order, enabling you to guard your credit score from damage in the future.
Drawbacks
In a detailed credit check, prospective lenders look not only at your credit score but also at your full credit report. This document includes your entire financial history for the past several years. A forbearance, regardless of the type of loan or specific circumstances, may indicate to the lender than you represent a risk and may not be able to pay back your new loan.
In addition, during a forbearance, your loan continues to earn interest. This means that when you begin making payments again, they will be higher because your loan will have a new, higher payoff amount.
Alternatives
Forbearance isn't the only way to deal with a loan that becomes difficult or impossible to pay back. A deferment is similar to a forbearance but may apply to different types of loans. Deferments and forbearances also may differ in terms of whether you must show proof of hardship as well as how long they last.
Prior to applying for a forbearance or deferment, you should contact your lender directly and explain your situation. Some lenders may lower your monthly payment or offer an extended-term repayment plan that allows you to keep making payments and preserve your credit score.
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