Forbearance vs Deferment

Difference Between Forbearance vs Deferment

Forbearance refers to a provision wherein the lender or creditor temporarily reduces or postpones the mortgage or loan payment. On the other hand, deferment is the process of deferring payment and adding it to the end of the loan term. Both these options help borrowers avoid defaulting when they are experiencing temporary financial difficulties.

Interest always accrues in forbearance, regardless of loan type, but it may or may not be the case with deferment, depending on loan type. In addition, the debtor has the option of returning the paused loan balance in a lump sum or over a period after forbearance, but they can repay it over time in deferment.

What Is Forbearance?

Forbearance is an arrangement between a lender or creditor and a borrower or debtor that allows the latter to stop making payments on their mortgage or loan for a set length of time. Also, they are free to request it if they are on the verge of missing out on paying an installment or are unsure about their current financial status.

This provision works the best when individuals suffer from temporary financial hardship as they get time to arrange for finances to resume the repayment once the contract is over.

The reduction in the loan repayment amount or extension of the loan term does not imply any concession in the loan balance that borrowers are liable to pay. Instead, it is only temporary relief for them until they regain financial stability and resume repayments. The interest, however, continues to accrue during the forbearance period. It means that the borrower must repay any missed payments along with additional interests after the agreement is over.

The non-payment of installments during the forbearance period does not make the borrower defaulter as it is an agreement between them and the lender. However, after the tenure is over, any missed payments would make them a defaulter.

Borrowers can either pay the loan at once or over a period as per their suitability post forbearance. The terms, conditions, and eligibility for the provision vary from lender to lender. Thus, exploring the same is highly recommended.

Types Of Forbearance

Forbearance is applicable for student loans, credit card loans, and mortgage loans. The provision is beneficial to students who take on debt to complete their education. They can request it until they find a decent job to begin repaying the loan.

It is usually of two types - General and Mandatory. The lender may provide general forbearance in light of the borrower's financial troubles due to unemployment or medical emergencies. Individuals enrolled in internships or residencies in medicine or dentistry, the Federal Family Education (FFEL) Program loans, working with the AmeriCorps or the National Guard, on the other hand, are all eligible for mandatory forbearance.

Forbearance Example

If a borrower requests to postpone their loan payments for September, October, November, and December, they must make all four payments in January, including the amount for that month. It is worth noting that the debtor must not miss out on any installments post forbearance.

What Is Deferment?

Deferment is often confused with forbearance. The words, however, denote two completely different scenarios. The borrowers opting for it can freeze their repayment for a set period and have the money added to the end of the loan.

The deferred loan repayment may or may not incur interest, making this process a more convenient alternative to forbearance. The duration varies depending on the type of loan. Similarly, whether interest may incur on the deferment repayment depends on the loan type:

Interest May Accrue	Interest May Not Accrue
Direct Unsubsidized Loans	Direct Subsidized Loans
Direct PLUS Loans	Federal Perkins Loans
Unsubsidized Federal Stafford Loans	Subsidized Federal Stafford Loans
Unsubsidized portions of Direct Consolidation Loans	Subsidized portions of Direct Consolidation Loans

This option is applicable for both mortgages and loans. Unemployed people, cancer patients, students, and military personnel are all eligible for this arrangement. It is a post forbearance scenario wherein the lender adds missing payments to the end of the loan term with or without any interest for the deferment period.

In the wake of the COVID-19 pandemic in 2020, the United States Federal Housing Finance Agency has introduced a new deferment option for homeowners with Fannie Mae and Freddie Mac-backed mortgages.

Under this option, effective from July 1, 2020, borrowers can ask their lenders to put a hold on their mortgage payments. Additionally, they can pay off the loan balance all at once after the loan term or when they sell or refinance their properties. The deferred repayment, in this case, will not accrue any interest. Furthermore, it will not last for an extended period, unlike traditional mortgage deferment.

Deferment Example

If a borrower skips 90 days of payments, the lender will allow them not to pay off the loan for the next three months. However, the life of the loan repayment would increase consecutively, adding the amount to be paid in the extra three months post forbearance period. So if someone has 10 years remaining to pay off a loan, the debt will extend to 10 years and three months. The borrower can repay the deferred amount over a period. Thus, they do not have to struggle with paying a lump sum for the loan balance.

Forbearance vs Deferment

Although the terms forbearance vs deferment mortgage are often used interchangeably by borrowers, they are different in meaning, essence, and utility.

To find the answer to - what is forbearance vs deferment, let us understand that both help borrowers deal with their financial difficulties by allowing them to pay a reduced amount or take a break from their regular repayment plan. Second, both of these choices are open to people who have taken out student or mortgage loans.

Despite their similarities, there are a few differences that set them apart. The most fundamental distinction is in the applicability of interest. In the case of loan forbearance, interest accrues for the period the borrower chooses not to pay the monthly installments. In deferment, the lender may or may not charge interest for the period the debtor opts not to repay.

Another thing to notice is that deferment is a post forbearance situation wherein the lender adds the missed installments to the total debt owed and allows the borrower to repay the balance over time rather than all at once.

Forbearance benefits lenders or creditors since they collect interest for the paused payment time. Whereas deferment is a more convenient financial choice for borrowers as they do not have to pay extra for the paused payment period.

Many lenders started offering people the option of either forbearance or deferment on their monthly mortgage payments during the COVID-19 outbreak. However, the debtor must negotiate the terms of both mortgage relief options with the lender to avoid paying additional interests or making repayments in one lump sum.

Forbearance vs Deferment Infographics

Forbearance vs Deferment Comparative Table

Here is a table to state the differences between forbearance vs deferment:

Particulars	Forbearance	Deferment
Definition	Temporarily reduces or postpones the mortgage or loan payment for a specific period	Defers the mortgage or loan payment and adds it to the end of the loan term
Option	Main Domain	One of the repayment options post forbearance
Eligibility	Financial difficulties due to unemployment, medical emergencies, divorce, natural disasters, internships or residencies in medicine or dentistry, the Federal Family Education (FFEL) Program loans, serving with the AmeriCorps or the National Guard, etc.	Financial struggle due to job loss, medical treatment like cancer or serving in the military, etc.
Interest Accrual	Interest accrues for the non-payment period and adds to the loan balance later, which increases the monthly payment	Interest may or may not accrue for the non-payment period depending on the loan type
Beneficiary	Lenders or creditors (banks or financial institutions)	Borrowers or debtors
Approval	At the lender’s discretion or per federal government ruling on meeting specific criteria	Depends on the lender or loan service provider
Span	Up to 12 months at a time with an extension of up to 18 months as proposed by federal entities	Length varies depending on the type of loan and deferment option. Could last for up to three years or even more
Payment benefits	Reduced or paused payment	Paused payment
Repayment terms	To be paid in one lump sum after the agreement or over a period	To be paid over a period

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