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Forbearance vs. deferment: what’s the difference?
When you’re in the midst of a financial crisis, it can seem nearly impossible to dig your way out—especially if you’re paying off loans. However, there are various alternatives to ease the strain on finances, like forbearance or deferred payments. Forbearance and deferment are terms often used interchangeably—but, there are differences between the two. We’ve broken down the basics of forbearance and deferment, so you can decide what works best for you and your financial situation.
What is forbearance?
A forbearance is an agreement between a borrower and lender to temporarily suspend or reduce payments. People typically request forbearance when they’ve experienced a temporary financial setback, like job loss or illness.
How does forbearance work?
During a forbearance agreement, lenders agree to accept reduced payments or no payments for up to 12 months. When the forbearance period ends, the borrower must resume payments and repay what they owed during the forbearance period, plus interest and possible fees. Repayments can be made in a lump sum or up to 12 installments added to regular monthly payments.
Most people request a forbearance on their mortgage or student loans. But, forbearance works differently depending on each situation.
Homeowners can request a mortgage forbearance to catch up on payments and avoid foreclosure. Most lenders require proof that homeowners are enduring a temporary financial hardship, as well as assurance that the borrower can pay back what they owe when the forbearance period is over. During the forbearance period, lenders stop foreclosure proceedings and allow the borrower to make reduced payments or no payments. If your financial trouble lasts longer than anticipated, or you don’t have the funds to make repayments, you can discuss options with your lender, like a loan modification.
Student loan borrowers can apply for forbearance when they are facing a temporary hardship and don’t qualify for deferment. With student loan forbearance, you can temporarily halt payments for up to 12 months at a time with no set maximum for federal loans. You do not need a specific, qualifying event to apply for student loan forbearance.
Are you still charged interest during a forbearance?
Interest accrues on both mortgage and student loan forbearance, unless otherwise stated. Because of COVID-19, federal student loans were placed on administrative forbearance, and interest rates were reduced to 0%, so they’re not accruing interest right now. For mortgage forbearance, interest accrues on skipped or lowered payments. So, you will have to pay back what you owed during the forbearance period, plus interest. For student loan forbearance, the amount you owe will always increase—at the end of your forbearance period, interest may capitalize, which means it’s added to your loan’s current principal balance. From there, interest will be calculated on the new amount.
Does a forbearance impact your credit score?
Mortgage forbearance can lower your credit score—but, it depends if your lender reports it to the credit bureau. If they do, then your credit score could dip. And, if you wanted to refinance or purchase a new home, you have to reestablish yourself as a credible borrower, so you must repay what you owe. Still, a temporary drop in your credit score from a forbearance is much better than a missed payment—and it helps avoid foreclosure, which can stay on your credit report for seven years. For student loans, forbearance does not affect your credit score.
What is deferment?
Deferred payments, sometimes called payment holidays, allow you to delay or suspend payments on a loan—generally a consumer loan. If you’re experiencing financial hardship, deferring a payment could be beneficial, as it temporarily halts the burden of making repayments. It could impact you in the long run—you may end up with higher monthly payments, and your loan’s term will increase.
How does deferment work?
Similar to a forbearance, during a deferment period, payments are suspended but for a shorter amount of time. And, unlike forbearance, you are not required to pay back what you owe all at once. What you owe is usually tacked onto the end of your loan’s term, which is why your loan term often increases. Most people request deferred payments on their auto loans or student loans. Again, deferred payments work differently depending on the circumstances.
Lenders will sometimes allow you to defer your car payment for a month or sometimes up to three months. Most lenders ask you to provide a brief explanation as to why you need to defer your payment, and they may also review your credit score or credit report. It can be a viable solution in the short run. But, deferring a car payment isn’t always the best long-term choice. If you realize your financial trouble may last longer than anticipated, discuss refinancing options with your lender.
Similarly, borrowers can request a deferment on their student loans to relieve the financial burden. Unlike forbearance, you must have a specific, qualifying event to be approved. Student loan deferment generally works best if you have a subsidized federal student loan or a Perkins loan. And, deferment length depends on the type of deferment—some last up to three years, while others last as long as you qualify.
Are you still charged interest during a deferment?
For student loans, interest does not accrue on subsidized federal student loans and Perkins loans. For other consumer loans, whether or not you’re charged interest depends on your loan type, so it’s best to check with your lender first. You may be responsible for interest that accrues while your payment is postponed. You could potentially receive a break if your interest rate only applies to your principal balance—which means you won’t be charged interest on the interest that accrues. Once you restart payments, the interest that accrued during your payment holiday could be added to your principal balance, and your interest rate would then be applied to the new, larger principal balance—meaning even more interest could accumulate once you resume your regular payments.
Does a deferment impact your credit score?
Deferred payments usually don’t impact your credit score. When your application is approved, your lender reports to the credit bureau that your payments are deferred. But, if you stop making payments or miss a payment due date before you’re approved, those missed payments could damage your credit. If you missed payments before you applied for a payment holiday, those won’t be removed from your credit history, either. You must continue making your payments until you have verification that your payments are deferred.
Deciding to apply for forbearance or deferment is an enormous decision, and there are various factors to consider. It’s critical to think about how long you anticipate a lapse in finances, your needs, and the potential outcomes.
If you’re facing financial trouble, you’re not alone—at Georgia’s Own, we’re here to help and provide financial advice and resources to get you through whatever financial struggles you’re facing. If you require financial assistance because of COVID-19, click here to see how Georgia’s Own is helping members during this time of need.
How deferred payments can help you through a financial crisis
Right now, many people have been unwillingly thrust into difficult financial situations. It leaves some wondering how they’ll continue making payments on their cars, credit cards, or other loans they may have. As a way to relieve some financial burden, you could apply to temporarily defer your payments. We’ve broken down the ins and outs of suspending a payment to help you weigh your options.
What is a deferred payment?
Deferred payments, sometimes called payment holidays, allow you to temporarily delay or suspend payments on a loan—generally a consumer loan. If you’re experiencing financial hardship, deferring a payment could be beneficial, as it temporarily halts the burden of making repayments. It could impact you in the long run—you may end up with higher monthly payments, and your loan’s term will increase. But, it’s better than accumulating multiple missed payments and late fees.
How does a deferred payment work?
To start, you’ll need to fill out an application with your lender. Once your application is approved, you can suspend your qualifying payment, without worrying about late fees. You must continue making payments until you have verification of your application’s approval. When your deferred payment period ends, you’ll resume your regular payments.
Does a deferred payment affect your credit?
The short answer—no, a deferred payment generally does not affect your credit score. When your application is approved, your lender reports to the credit bureau that your payments are deferred. But, if you stop making payments or miss a payment due date before you’re approved, those missed payments could damage your credit. If you missed payments before you applied for a payment holiday, those won’t be removed from your credit history, either.
Are you still charged interest on deferred payments?
You may be responsible for interest that accrues while your payment is postponed. You could potentially receive a break if your interest rate only applies to your principal balance—which means you won’t be charged interest on the interest that accrues. However, once you restart payments, the interest that accrued during your payment holiday could be added to your principal balance, and your interest rate would then be applied to the new, larger principal balance—meaning even more interest could accumulate once you resume your regular payments. This all depends on your loan type and lender, so it’s best to confirm with them.
What alternatives are there?
If you ultimately decide you don’t want to defer your payments, there are other options available if you need financial support. Depending on the loan type, you could consider refinancing. Your new loan could potentially have a longer term or lower interest rates, leading to lower monthly payments. You may also consider a debt consolidation loan. Check with your lender to discuss potential alternatives.
If you require financial assistance because of COVID-19, click here to see how Georgia’s Own is helping members during this time of need.
What to do if you’re in real financial trouble
It’s a problem that no one likes to admit, but that happens to nearly every person at some point in their lives: a serious lack of funds. The current crisis has left many unsure if they will be able to make their next mortgage payment, or even get groceries for the week.
If you are in financial trouble and are looking for your next steps, read on for some of our ideas and tips on the best way to turn your struggles into success stories. Some of the best resources for help are right here in Atlanta:
United Way of Greater Atlanta: This organization is all about making connections to get you and your family everything they need, from a hot meal to polishing your resume.
The Salvation Army: There are several local locations of this group, which strives to help those struggling with homelessness, at-risk youth, financial issues, and the fight against human trafficking.
Downtown Atlanta: Don’t let the name fool you; this group serves all of Atlanta through their community service initiatives. Along with raising awareness for important global projects, Downtown Atlanta also has resources for those who need to get off the streets and into a stable residence.
CAPS: CAPS, or Childcare And Parent Services, is a program designed to help parents with low income find affordable, quality childcare so the parents can work or attend school. Their goal is to ensure that no child is denied education due to a financial strain.
National Foundation for Credit Counseling: The NFCC has long established a reputation of helping people across the United States figure out the next steps to manage their debt. Their website also offers a variety of tools and resources to aid you at any time.
You know where to go – now let’s talk about what you can do when you’re in real financial trouble.
Don’t ignore financial trouble
As we said above, no one likes to admit when they are in financial trouble. It may embarrass you, or perhaps you just aren’t comfortable with that level of vulnerability. Whatever the reason, the result is the same: Your money problems will not disappear, no matter how long you refuse to acknowledge them. In fact, they may just get worse.
You need a budget
You know how we feel about budgets – everyone needs one, and we mean everyone. Even if you know that there is no way your income covers your expenses, you need to make a budget to see where you stand financially. How can you plan to recover from a money crisis if you aren’t even sure how much you spend on gas every week?
See what you can trim or cut
We know that you have probably already started to cut back on the non-essential items. But have you looked at ways to save on some of the more necessary parts of your budget?
For instance, you can look for coupons at your local grocery store to see if you can save a few cents on your dinners for the week. Try consignment stores first when your kids need clothes for the spring. Saving a few cents and dollars here and there can add up a lot over time.
Consider talking it out
DJ Tanner of Full House said it best: You might not solve anything, but just talking about it helps. You don’t have to wait for the sappy violins to play, but if you are experiencing significant financial distress, it’s a good idea to talk to someone. They don’t have to be a professional – a good friend will work, too. Shouldering an emotional burden is an unnecessary stress you don’t need to add to your full plate.
Find good resources
There are organizations around Atlanta who want to help with everyday needs – but they can’t unless you tell them what you need. Places like United Way of Greater Atlanta, HOPE Atlanta, and the Atlanta Center For Self Sufficiency are just a few of the local resources that can assist you with housing and other basic needs. Reach out to them to learn what you need to do to take advantage of their resources.
Consult an expert
Once you get the help you need for the basics, it’s time to take charge of your finances. Check out free resources like the ones Dave Ramsey offers, or head to Udemy to take a class on creating and maintaining a budget.
If you want local referrals to an accountant who can help, dial 2-1-1 or text your zip code and need to 898-211, and the United Way of Greater Atlanta will reach out to you with the information you need. No matter what path you take, don’t try to go it alone – find the right people to help you succeed.
Get some credit counseling
Speaking of experts, have you considered seeking credit counseling to help you build your credit back up? Places like MoneyManagement International offer their expertise both in person and over the phone, for everything from managing debt to working through student loans. Getting this type of counseling will go a long way in shaping your future as you recover from this financial crisis.
Stick to your plan
You have the information you need from your financial advisor and other experts. Now it’s time to buckle down and follow the plan you made with them. Will it be difficult? Probably. But anything worthwhile is.
Take the steps outlined by your professional consultant, and do not vary from them, even a little bit. If you’re not sure how to proceed in a particular circumstance, give your advisor a call to see what they would recommend.
Let others know how to help
Asking for help, or even just accepting it, can be hard. We know that. But the truth is that everyone needs help sometimes. This can even be something as small as letting someone know what your financial limitations are so they can help keep you accountable. Or see if anyone you trust can give you more ideas for resources in your area.
Financial problems can be overwhelming, but they don’t have to dictate the rest of your life. Find the right help, take the right steps, and watch as you take control of your financial future.
6 ways to make the most of your tax refund
You’ve finally received your tax refund! While it’s exciting to have some extra cash, it can be tempting to spend it on whatever, whenever—after all, it does seem like free money. However, it’s crucial you use your refund wisely, rather than spending it on frivolous things. Here are some ways you can make the most of your tax refund:
Pay off existing debt
It sounds obvious, but if you have student loan or credit card debt, use your refund to help pay it off. It might not sound fun, but putting money towards paying your debt gets you closer to financial freedom. Interest rates can snowball and make payments seem overwhelming, so any amount you put forward helps. Start by paying off debts with the highest interest, and then trickle down from there. Later on, once you’ve finally eliminated your debt, you’ll be thankful you were responsible and used that refund.
Save it for emergencies
Again, another obvious choice—save your refund! According to CNBC, 30% of households have less than $1,000 saved. That isn’t nearly enough to cover your costs if you were to have an emergency like your car breaking down or any unexpected medical bills. Ideally, you should have three to six months’ worth of living expenses saved. Open a savings account if you don’t have one already, and save your refund. Even if you can’t put away that much, use a portion of your refund—just a little is better than none.
Start home improvements
Have you been dying to give your home some much-needed improvements but had to put your funds elsewhere? Well, now that you have your tax refund, you can start your home renovation plans now! There are dozens of projects you can do for under $1,000—from painting to landscaping, those little improvements can all help your home drastically. Not only will it make you happier, but it will also add value to your home.
Use towards big purchases
Does your child need braces, or are you looking to buy a new car? Maybe even a home? Your tax refund is perfect for offsetting those costs. Use it to save for a down payment on a car or house. Every little bit helps when it comes to these purchases, so make your refund count where it should. Open a high-yield savings account, like a money market savings account, so you can earn the most from your money.
Donate to charity
Earn some good karma—donate part of your refund to charity. It feels nice to give back to the community, and using part of your refund to help your favorite organization is the perfect way to do so. Be sure to save your receipts, too, so you can write off the donation on your taxes next year.
Lastly, if you’ve done all of these things, help yourself! We all need self-care sometimes. Go on the trip of your dreams, or simply treat yourself to a new wardrobe—either way, don’t forget about making sure the most important thing is taken care of: you!
Seven strategies for paying off student loans
Graduation is a time of celebration. You’ve finished four—ok, maybe five years of school, and you’re ready to conquer the world. Do you know what else you should be ready to conquer? Your student loan debt.
In 2018, the total amount of student loan debt in the U.S. was at an all-time high at nearly $1.5 trillion. Spread over 44 million borrowers, you can take comfort in the fact that you’re not alone. While the idea of repaying your debt may be overwhelming and a seemingly impossible feat, take heed. We’ve got a few words of wisdom that can help you get started. With some self-discipline and a little sacrifice, you’ll be able to wipe out that I.O.U. sooner than you think.
Here are some practical strategies you can use to get your finances in order, knock down that debt, and be well on your way to financial freedom:
1. Live like a college student
You’re eager to venture out into the real world and live on your own. You want to rent a cool apartment that doesn’t include a hand-me-down couch and four other roommates. We get it. But if you can stand it, try not to inflate your current lifestyle too quickly. By keeping the same penny-pinching habits you used in college, you’ll be able to send a bigger chunk of your paycheck to your lender. The quicker you pay it down, the faster you’ll graduate to a more comfortable lifestyle that doesn’t include a repayment plan.
2. Send more than the minimum payment
If you continue to send the required minimum loan repayment each month, it’ll take the full term of your loan to pay it off. You’ll also wind up paying the maximum amount of interest. Consistently sending more than your $50 minimum payment, for example, will not only help you pay the balance down more quickly, it will significantly reduce the total amount of interest you pay over the term of the loan. Increasing your payment by any amount will save you both time and money, and who wouldn’t want that?
3. Pick up a side hustle
If you need more money, find a way to bring in additional income. Maybe you DJ on the weekends, wait tables at night, or work as a freelance photographer. Whatever your talent, parlay it into a side hustle. The key here is to have enough discipline to take the extra income and pay down your student loans. It’s not a way to save for a vacation, to buy a new car, or a Louis Vuitton bag—right now, anyway. If your objective is to tackle your student loans, keep your eye on the prize!
4. Send extra payments
Did you get a tax refund, a bonus at work, a little extra cash in your birthday card? It might not be the most exciting thing to do, but paying down your loan with a windfall, no matter how big or small, is the financially smart thing to do. Making extra payments, whether it’s each month, every quarter, or whenever you happen upon some extra cash, will speed up your loan repayment and reduce your total interest expense. The faster you pay it down, the more money you save, and the quicker you get out from underneath that student loan debt.
5. Add loan repayments to your gift wish list
C’mon, how many Starbuck’s gift cards do you really need? When friends and family ask you for birthday or holiday gift suggestions, you might tactfully ask them for a cash gift to pay down your student loan balance. Check out sites like LoanGifting or Generosity, now a part of GoFundMe, to make it official. Services like these are exclusively dedicated to helping reduce student loan debt by accepting and processing loan repayment donations. Set up a profile, connect it to your loan account information, and gift-givers can help you on your road to financial freedom.
Be sure to read the fine print, though. Setting up an account is free, but there are some fees deducted from each financial gift.
6. Refinance your student loans
Consolidating and refinancing your student loans at a lower rate can help you reduce the amount of interest you’ll pay. It may also allow for a shorter repayment term and a quicker route to becoming debt free. With one loan, one monthly payment, and a more competitive interest rate, it’s worth a look. There’s no harm in evaluating your options, especially when there may be an opportunity to save some cash and reduce your debt more quickly.
7. Look for employers who can help
Student loan repayment assistance is an employee benefit that’s growing in popularity. In fact, according to Forbes, it was the hottest employee benefit of 2018. Check out their list of ten companies that are already on board.
There are other similar programs, too. Government employees may be eligible for the federal government’s Student Loan Repayment Program. Nurses and teachers may be eligible for the Nursing Education Loan Repayment Program and Teach for America, and public sector employees may be able to receive assistance through the Public Service Loan Forgiveness Program.
Weighted down with student loan debt isn’t the ideal way you’d like to begin this next chapter of your life, but it’s a reality for most college students. You can make the minimum payments, repay your loans as scheduled, and live happily in the process. But, if you’re anxious to finish those monthly payments and begin investing in your future, use these strategies and get started sooner than later.
What you need to know before lending (or borrowing) money from family
In the midst of a financial crunch, most people consider borrowing money from a family member to be a better option than a bank or credit union, a good friend, their 401(k) plan, or even a low- or no-interest credit card. While most people look to their family as the non-judgmental, do-anything-to-help, ideal solution to their financial dilemmas, there are pros and cons to entering into this arrangement for both the lender and the borrower.
It seems like a simple transaction
From the borrower’s perspective, the application process is simple—just ask. Other than explaining why it’s needed, there are typically no other requirements to meet, not even a credit check. Even better, family members are often generous enough to loan money for free. Most don’t charge any interest, or if they do, it’s much lower than the best rate a bank or credit union could offer.
Family members are often eager to help, but if they’re lending money, they should understand their motivation behind their offer and the risks they assume in doing so.
The details define the loan
When a family member loans money to another family member, details need to be documented, and specific expectations must be set. Conversations around money are tough and sometimes extremely awkward. Think of this as the price you pay for borrowing money from a relative.
Discussions should address the reason for the loan and whether or not the lender is expecting to be repaid. A repayment schedule should be agreed upon, including dates, amounts, and method of repayment, and steps that will be taken if the borrower defaults on the loan.
The borrower should be able to provide the plan for repaying the loan and address the possibility of missed payments. Discussions should also define any rights that are granted to the lender until the loan is repaid in full, like approving large purchases or vacation plans, reviewing a monthly budget, or monitoring bank accounts.
The more detail discussed before the loan is issued, the better chance of preserving the family relationship. Many family loans are successful, but, in order to avoid tensions, communication must be continuous, clear, and in writing. While some family members might consider this too formal, it’s for the protection of both parties.
Lenders need to protect themselves
Any time you lend money, there’s a risk that the borrower will not be able to repay the loan. While you may have every confidence that the borrower will be true to their word, lenders should consider collateral to secure the loan. In the case of default, the sale of any named asset could help recover the outstanding balance.
Speak with your attorney to discuss any additional risks that you should address in order to protect yourself. You can also ask your attorney to draft the written agreement that includes the agreed upon details of the loan and its repayment.
Tax implications to consider
In addition to ironing out the details of the loan, there are serious tax issues to consider. The transfer of large amounts of money can alert the IRS. Even without any wrongdoing, it could trigger an audit into your finances.
There are also rules that address the minimum interest rates that can be charged on personal loans and a potential gift tax that can be assessed in some cases. There may be other tax implications that you hadn’t yet considered, so be sure to talk with your tax advisor before you set an interest rate, sign any documents, or transfer any funds.