Money Health

What Happens When Your Loan Forbearance Ends?

When Loan Forbearance Ends
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If you are one of the thousands of people who lost their jobs overnight or faced extreme financial hardships during the pandemic, then you probably understand loan forbearance. Forbearance has become part of our national conversation ever since the COVID-19 recession limited so many Americans’ ability to pay their bills, including their loans.

Getting forbearance from a lender on a mortgage, student loan, car loan or even credit card debt usually means that your monthly payments are reduced or put on hold. So while it may provide temporary relief, when the forbearance period ends, you will probably be required to pay the full amount of your missed payments. Are you prepared?

As your loan forbearance period comes to an end, here’s what you need to know:

Mortgage Forbearance

According to the Mortgage Bankers Association, around 8% of loans were in forbearance as of June, representing an estimated 4.2 million homeowners nationwide. While this assistance has helped many Americans regain some financial footing, for others, a foreclosure might still be a real concern.

While processes differ by state and there are exceptions, under federal law, a servicer generally cannot start the foreclosure process until a loan is overdue by 120 days. To lessen your chances of facing foreclosure, here are four things you can do before your mortgage loan forbearance ends:

  1. Full repayment: If your financial situation allows, opt for a one-time full repayment of skipped payments.
  2. Plan extension: According to the Consumer Financial Protection Bureau, before the first 180-day forbearance ends, you may request another 180 days. This will give you a total of 360 days of forbearance.
  3. Explore mortgage refinance options: You will need to show a strong eligibility for refinancing (history of timely payments, good credit score) as most lenders have significantly tightened their standards for refinancing during the recession.
  4. Loan modifications and reductions in interest rates: It may be difficult to anticipate how long your financial hardships may last, given the current economy. So, if you can’t be sure of your repayment plan, you can consider a loan modification through Fannie Mae or Freddie Mac. Be aware that some lenders might charge fees, while others may not.

Federal student loan forbearance

There are two key types of forbearance that apply to student loans: general and mandatory. You should understand which one applies to you during your current forbearance.

General Forbearance – This common type of forbearance usually applies if you are facing temporary difficulties due to financial hardships, medical expenses, or a change in employment. A general forbearance may be granted for no more than 12 months at a time. If you are still experiencing a hardship when your current forbearance expires, you may request another general forbearance.

Mandatory Forbearance – This this most commonly applies to those who are serving in an AmeriCorps position for which a national award was received, serving a medical/dental internship or residency program under specific terms, are performing a teaching service, qualify for partial repayment of loans under the U.S. Department of Defense Student Loan Repayment Program, or are a member of the National Guard and have been activated by a governor.

When it comes to student loan forbearance, it’s important to remember that the CARES Act, and the related executive order signed recently by President Trump, only applies to federal student loans.

If you have a private student loan and are unable to make your payments, you should contact your lender directly to ask for a student loan forbearance. Once your forbearance period ends, your student loans will start accruing interest again and the rate will return to whatever it was before the forbearance period began. Federal student loan interest rates are based on the school year in which you borrowed the loans and what type of loans you borrowed.

While initially set to expire on September 30th, 2020, the principal and interest payments on most student loans in forbearance have are now slated to expire on December 31st, 2020. You can expect a notice to come prior to your first repayment in January.

Here are two things you should consider doing before the end of the year:

  1. Restructure your budget – While cell phone bills, utilities, rent and groceries are essential, there are other expenses you may be able to cut to make room for your loan payments. For instance, consider postponing buying a new phone, any travel plans, and get rid of gym or other memberships you don’t use.
  2. Student loan refinancing – Another option is refinancing and converting your federal student loaninto a private loan. This could mean forfeiting the borrower protections that come with federal student loans – including future forbearance options, which are not as liberal as on federal student loans.

Deferment vs. Forbearance

You should be aware that deferment and forbearance are two different repayment processes. Both options allow you to postpone your monthly federal student loan payments, but if you are in deferment, generally no interest will accrue to your loan balance. With forbearance, interest will accrue on your loan balance.

Auto Loan Forbearance

If you have skipped this month’s car loan payment, don’t worry – you are not alone. Studies show that 25% of Americans in financial duress are concerned about being able to make their loan payments.

Before COVID-19, if you missed a payment, your auto loan lender would report your non-payment to the credit bureaus after 30 days overdue and be likely to seize your vehicle if you continued to miss your payments. However, in our current world, many lenders are open to discussing a range options available to borrowers.

You could be allowed to skip anywhere from one to three payments in a row without incurring any late payment fees or penalties and your credit score should not be negatively impacted. However, since the interest on your car loan will continue to accrue, make sure you start budgeting for repayment. Along with this calculation, before forbearance ends you should:

  • Talk to your lender: Start reaching out to your lender long before you anticipate a missed payment, as most lenders are facing an overload of call volumes and reduced staffing. They might have some additional options or be willing to renegotiate your loan terms.
  • Refinance your loan: Auto refinancing volumes have increased since the pandemic began. A refinanced loan could have a lower interest rate and a lower instalment amount each month.
  • Surrender your vehicle: While this may be a last resort, it might be an option if your car value is lower than your loan value. Calculate the loan to value ratio to get a better idea of where you stand financially. Surrendering can be an option to consider if your company has instituted a longer term work from home program and you don’t need your car as much as you used to.

Credit Card Forbearance

Credit card forbearance occurs when your credit card issuer agrees to provide relief by allowing a reduction in your payment amount or interest rate, or allowing you to skip payments altogether.

One key benefit of forbearance is that there is usually no consequence for your credit report if you are making regular interest payments. Just note that your credit card account will stay at whatever status it was at the start of the forbearance throughout the forbearance period. So if you were delinquent on an account before, you will still be shown as delinquent during forbearance.

Before your forbearance period ends on your credit card, make sure you ask yourself these questions:

  1. Can I resume making regular payments after the forbearance period ends?
  2. If my card issuer reduces my borrowing limit, will it hurt my ability to make ends meet?
  3. Should I look into a plan that settles the balance in fixed instalments? If so, can I live without making new charges?

Bringing it all together

While the assistance provided by a forbearance period is extremely valuable, nothing beats the option of paying off your loan as soon as your financial situation improves. Don’t wait for your loan forbearance period to end if you have the opportunity to start re-paying interest and outstanding payments. This can make a major difference to your overall financial health.

What if you are still struggling with debt even after forbearance?

If you know you’re still going to be struggling with unsecured debt after the forbearance period ends, it might be time to get some help. Freedom Debt Relief is here to help you understand all your options for dealing with your credit card and other types of unsecured debt. Our Certified Debt Consultants can help you find a solution that will put you on the path to a better financial future. Find out if you qualify right now.

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Hirak Bhayani is a former private banker with India's largest bank where she managed the wealth portfolios of ultra HNIs. She recently completed her Masters in Analytics from Duke's Fuqua School of Business and when not building predictive models, writing on banking and finance, or daydreaming, she loves reading and sampling the many varieties of Chicago deep-dish pizza.