Forbearance vs. Deferred Payment Plans: How to Choose the Right Option During Hardships
Financial hardship can strike unexpectedly, whether due to job loss, health issues, or broader economic crises like the COVID-19 pandemic. When you’re struggling to make payments, you might hear about two popular relief options: forbearance and deferred payment plans. These programs can provide much-needed breathing room, but they work in different ways and can have different impacts on your finances and credit score.
This article will break down the mechanics, pros and cons, and credit score implications of forbearance and deferred payment plans. By understanding these options, you’ll be better equipped to negotiate the right terms with your lender and choose the best strategy for your financial situation.
1. The Mechanics of Forbearance and Deferred Payment Plans
Forbearance
Forbearance is a temporary postponement or reduction of your payments, typically granted due to financial hardship. It’s commonly used for mortgages, student loans, and other types of long-term debt. During forbearance, payments are paused for a specified period, usually between 3 to 12 months.
- How It Works: During the forbearance period, you are not required to make regular payments. However, interest usually continues to accrue, and you’ll be responsible for repaying it later. Once the forbearance period ends, you will need to resume your regular payments and possibly catch up on missed payments through a lump sum or a repayment plan.
Deferred Payment Plans
Deferred payment plans allow you to delay payments without penalty, often adding the missed payments to the end of your loan term. Unlike forbearance, deferred payments typically do not require immediate repayment after the deferral period ends.
- How It Works: In a deferred payment plan, the missed payments are postponed and rescheduled to be paid either at the end of the loan term or spread out over future payments. Interest may or may not accrue depending on the terms of the agreement.
2. Pros and Cons of Forbearance and Deferred Payments
Both forbearance and deferred payment plans offer financial relief, but they come with different advantages and disadvantages.
Forbearance: Pros and Cons
| Pros | Cons |
| Immediate Payment Relief: Forbearance allows you to pause payments for a set period, offering immediate financial relief. | Interest Accrues: Interest continues to accumulate during the forbearance period, increasing the total amount you owe. |
| No Immediate Credit Impact: If managed properly, forbearance doesn’t negatively impact your credit score as long as payments are resumed after the forbearance period. | Lump-Sum Repayment Risk: Some lenders may require you to make a lump-sum payment at the end of the forbearance period to cover missed payments. |
| Flexible Term Lengths: Forbearance can be short-term (e.g., three months) or long-term, depending on your agreement with the lender. | Temporary Solution: Forbearance only provides short-term relief and doesn’t reduce the overall amount you owe. |
Deferred Payment Plan: Pros and Cons
| Pros | Cons |
| No Immediate Repayment Required: Payments are pushed to the end of the loan term, giving you more time to recover financially. | Extended Loan Term: Deferring payments means extending the life of your loan, which may result in higher overall interest costs. |
| Credit Score Protection: Deferred payment plans typically do not negatively affect your credit score, as missed payments are rescheduled and not reported as delinquencies. | Not Always Interest-Free: In some cases, interest may continue to accrue, depending on the loan type and agreement. |
| Predictable Repayment: Unlike forbearance, which may involve a lump-sum payment, deferred payments are often spread out over time, making repayment more manageable. | Limited Availability: Not all lenders offer deferred payment plans for all loan types, particularly for credit cards or short-term loans. |
3. Impact on Credit Scores Under Each Scenario
Both forbearance and deferred payment plans are designed to help borrowers avoid the negative consequences of missed payments, but they can still impact your credit score in different ways.
Forbearance and Credit Scores
When you enter into a forbearance agreement, your lender typically reports the account to the credit bureaus as “in forbearance.” This indicates that you are receiving special accommodations due to hardship. While forbearance itself doesn’t hurt your credit score, the following factors may come into play:
- Credit Utilization: If you’re using a revolving credit account, such as a credit card, entering forbearance may increase your credit utilization rate, especially if you’re not paying down your balance. This can negatively impact your score.
- Post-Forbearance Payments: If you fail to make timely payments after the forbearance period ends, this could lead to delinquent reporting, which would hurt your credit score.
Deferred Payment Plans and Credit Scores
Deferred payment plans are generally less risky for your credit score because the payments are rescheduled rather than missed. Since you are not technically behind on payments, lenders typically do not report deferred payments as delinquencies. However:
- Continued Reporting: Lenders may still report your outstanding balance and the amount deferred, which could affect your overall debt-to-income ratio. This is an important factor in certain credit models.
- Credit Utilization: If you’re deferring payments on revolving credit (like credit cards), ensure your utilization rate doesn’t exceed 30% of your credit limit, as this can lower your score.
4. How to Negotiate the Best Terms with Lenders
Once you’ve decided whether forbearance or deferred payment plans are best for your situation, it’s time to negotiate with your lender. Here’s how to approach the conversation:
A. Be Proactive
The best way to get favorable terms is to contact your lender early. Don’t wait until you’ve missed a payment. Lenders are generally more willing to offer flexible terms if you communicate before falling behind.
B. Know Your Rights
In some cases, particularly during large-scale disasters like the COVID-19 pandemic, federal laws may offer protections or mandate certain relief options for borrowers. For example, the CARES Act allowed borrowers with federally backed mortgages to request forbearance for up to 12 months without penalties. Make sure to research any legal protections or relief programs available to you.
C. Ask About All Available Options
When speaking with your lender, ask about both forbearance and deferred payment options. Depending on your financial outlook, one may be more suitable than the other. If your lender offers both, consider whether you prefer short-term relief with the ability to catch up quickly (forbearance) or a longer-term solution that postpones payments without requiring a lump sum (deferred payments).
D. Get Terms in Writing
Once you’ve agreed on a plan, request that your lender provide the terms in writing. This documentation will help you understand when payments are due, how interest will be handled, and whether your credit report will be affected. Having this in writing also protects you in case of any future discrepancies or errors in reporting.
Conclusion
When facing financial hardship, forbearance and deferred payment plans can provide critical relief. While forbearance offers immediate help by pausing payments, it can result in interest accumulation and potential lump-sum payments later on. Deferred payment plans, on the other hand, delay payments and offer more predictable repayment structures but may extend the life of your loan.
Ultimately, choosing the right option depends on your financial situation, future outlook, and ability to manage repayment after the relief period. By understanding the mechanics, pros and cons, and credit score implications of each option—and negotiating favorable terms with your lender—you can make an informed decision that protects both your finances and your credit score.
