Forbearance allows borrowers to temporarily postpone or reduce loan repayment without being marked delinquent, without incurring additional charges for delinquency. Our analysis reveals that consumers entering debt forbearance typically have lower credit scores, lower incomes and greater debt balances compared with those who do not enter forbearance agreements.
Borrowers with auto and mortgage loans must resume payments that include interest and all missed payments when their forbearance ends.
1. Delinquency Rates
Borrowers who enter forbearance see delinquency flags lifted from their credit reports and their debt balances decrease, helping to boost their credit scores during this period and make them eligible for lower mortgage rates or more flexible student loan repayment programs.
Forbearance also benefits lenders by reducing default and collection costs, making it popularly offered with mortgages, student loans, credit card debt and auto loans.
Loan forbearance’s effect on credit scores depends heavily on whether borrowers resume regular payments when their relief period ends and how their lenders report any adjusted payments to credit reporting agencies. Missed payments damage credit scores; however, if you can return to making regular payments and sticking with your repayment schedule your score should begin recovering quickly.
Forbearance also affects which loans borrowers qualify to take out in the future. Borrowers in forbearance tend to have less revolving debt or home equity lines of credit and may have difficulty finding financing options in the future.
2. Payment History
Forbearance itself typically doesn’t impact borrowers’ credit scores; however, how lenders handle missed payments may. Great Lakes began reporting loan status to credit bureaus by noting they were current with $0 monthly payments but these payments had been “deferred.” Such notations can significantly lower a borrower’s score.
Borrowers who qualify for forbearance typically don’t need to make payments during the forbearance period, though any interest accrued may need to be covered. Therefore, forbearance should only ever be seen as a temporary solution for those experiencing financial hardship.
If your financial struggles don’t appear to have an end or you are unable to negotiate an arrangement with your lender or servicer, other solutions might be better, such as income driven repayment or loan settlement. Otherwise, forbearance could leave you in greater debt while servicers become less inclined to grant concessions in future negotiations.
3. Balances
Loan forbearance can provide short-term relief, yet its long-term effect depends on how lenders report your payments to credit bureaus and whether or not any excused payments are recouped after your forbearance period ends; this might involve making up any missing installments by adding them onto regular monthly payments or adding them onto the end of your loan term.
Student loan forbearance doesn’t typically impact your credit score directly; however, interest does accrue on subsidized student loans that could add it onto principal balances when the forbearance period ends. Personal loan forbearance could have more of an indirect effect if accruing interest bloats your balance or increases credit utilization rate – it is therefore wiser to focus on paying your primary bills during forbearance periods.
4. Payment History
Borrowers who receive loan forbearance tend to have lower credit scores and larger debt balances, as well as being less likely to qualify for income-driven repayment plans (IDRP), which offer $0 monthly payments but could help reduce debt burdens over time.
Research by our mortgage lender shows that their decision to grant forbearance may have an adverse impact on your credit score, depending on how lenders report missed payment information to credit bureaus. On average, those who resume paying will see their scores improve by 8 points over time.
Before seeking forbearance, it’s essential to be honest with yourself about whether and when your payments can resume normally. If it appears impossible for you to continue making payments on time, other options might be more suitable such as loan deferment or foreclosure which will remain on your credit report for seven years thereby making new loans much harder to come by in future.
