Personal Loans (if applied before 7/13/19) and Student Loan Forbearance:
What do I need to know?
How does forbearance work?
Loan forbearance is a short-term payment relief solution. It is a period of time where no payments are required although interest accrues. When we offer a COVID-related forbearance through Firstmark, our loan servicer, the term of the loan extends so that you can make the same number of payments that you chose when you started your loan. At the end of the forbearance period, a new, potentially higher monthly payment is calculated that accounts for the accrued interest and unpaid principal.
What does it mean when you say that interest will accrue?
You have a “simple interest” loan. This means that interest is assessed every day. To calculate how much interest is assessed each day, you can multiply your principal balance by your loan’s interest rate and then divide by 365. To see how much interest built up while your loan was in forbearance, multiply that daily interest amount by the number of calendar days since your last payment.
At the end of your forbearance period, we will calculate a new payment amount that is sufficient to repay this interest and your principal balance over the remaining term of your loan.
Why might my payment be higher after my COVID-related forbearance?
Your payment could possibly be higher after a COVID-related forbearance. This is because at the end of your forbearance period, a new payment will be calculated that is enough to repay your total balance with interest, including the interest that built up during your forbearance period. If you had been paying more than your minimum payment before your forbearance, it is possible that your new payment might be lower. If you had been paying your monthly payment, it is likely that your new payment will be higher.
What happens at the end of my forbearance?
Once your forbearance period has ended, your monthly payment will be recalculated to enable you to pay off the balance of your loan by the new final payment date. Note that this new monthly payment may be higher than your previous monthly payment, as it includes the accrued interest over the forbearance period.
What are the downsides of forbearance?
If you were forced to choose between defaulting on your loan or applying for a forbearance, you made a good choice! Forbearance should only be used when needed because it may cost you more in interest. You may also have a higher monthly payment after your forbearance ends.
Is there anything I can do to minimize the downside of forbearance?
By paying a little extra when you can, you will reduce the amount of interest paid over the life of your loan. Consider rounding up your payment each month, or dedicating a portion of a bonus or tax refund to reduce your balance. Remember you can also prepay your loan without penalty.
Does forbearance get reported to credit reporting agencies?
Yes, we are required to report your account accurately to the credit bureaus. We report the forbearance as a part of our monthly reporting process and code the account as ‘impacted by a natural or declared disaster.’
Can you provide an example of what payments may look like as a result of forbearance?
If you borrowed $25,000 at an 8% interest rate for 10 years, your monthly payment would be $303.32. If you needed to take a 3-month COVID-related forbearance, starting in the 11th month of your loan, this is what you could expect:
- Your monthly payment amount after forbearance would be $309.39, or about $6 per month higher than before the forbearance.
- Your final payment date would be 3 months later than it was prior to the forbearance.
- Your first three monthly payments after forbearance would go towards paying off the interest that accumulated while your loan was in forbearance. There is no reduction to your principal during this time.
- The following factors influence the amount of your payment increase:
- The length of your forbearance
- How far into your loan you were when your forbearance started (the earlier in your loan, the greater the payment change as a result of the fact you pay more in interest upfront versus towards the end of your loan term)
- Your interest rate
- Your loan balance at the start of your forbearance
- The timing of your payments (paying before your monthly due date reduces your interest cost; paying after your monthly due date increases it)
- The amount you decide to pay each month (paying a little extra when you can will reduce the amount of the final payment, although you are not required to do this)
What would happen if I needed a second 3-month COVID forbearance?
Using the above example, here is what you could expect if you took two 3-month extensions:
- Your monthly payment amount after forbearance would be $315.45, or about $12 higher.
- Your final payment date would be 6 months later than it was prior to the forbearance.
- Your first five monthly payments after forbearance would go towards paying off the interest that accumulated while your loan was in forbearance. There is no reduction to your principal during this time.