Forbearance

Forbearance

Forbearance is a temporary agreement between a borrower and a lender that allows the borrower to pause or reduce their loan payments for a set period of time. Rather than defaulting on the loan, the borrower receives short-term relief while they work through a financial hardship. Forbearance is not forgiveness. The borrower is still responsible for repaying the full amount owed, and interest may continue to accumulate during the forbearance period.

Lenders may offer forbearance to borrowers who are experiencing circumstances such as:

• Job loss or sudden reduction in income
• Medical emergencies or unexpected large expenses
• Natural disasters or other qualifying hardships
• Military deployment

Forbearance is most commonly associated with student loans and mortgages, but it can also apply to other types of loans, including auto loans and personal loans. The specific terms of a forbearance agreement vary depending on the lender, the type of loan, and the borrower’s situation.

How Forbearance Works

To enter forbearance, a borrower typically contacts their lender and submits a formal request explaining their financial hardship. The lender reviews the request and, if approved, outlines the terms of the agreement. These terms usually include:

• The length of the forbearance period, which often ranges from one to twelve months
• Whether payments are completely paused or simply reduced
• How missed payments will be handled once forbearance ends
• Whether interest will continue to accrue during the pause

Once the forbearance period ends, the borrower must resume regular payments. In many cases, the borrower may also need to repay the missed or reduced payments. Depending on the agreement, this could mean a lump sum payment, a temporary increase in monthly payments, or an extension of the overall loan term.

A Simple Example

Suppose Maria has a mortgage with a monthly payment of $1,200. She unexpectedly loses her job and cannot afford her payments. She contacts her mortgage servicer and requests forbearance. The lender approves a three-month forbearance period, during which Maria pays nothing. However, interest continues to build on her loan balance during those three months.

When the forbearance period ends, Maria has found new employment. She and her lender agree to add the three missed payments to the end of her loan term, extending it by three months. She then resumes her regular $1,200 monthly payment.

Important Considerations

• Credit impact: Forbearance is generally reported differently than missed payments, but it is important to confirm with your lender how they report forbearance to credit bureaus.
• Interest accumulation: Because interest often continues to grow during forbearance, the total cost of the loan can increase significantly.
• Not automatic: Forbearance must be requested and approved. Simply stopping payments without an agreement can result in serious consequences, including default.
• Explore all options: Before requesting forbearance, borrowers should ask their lender about other relief options, such as loan modification or income-driven repayment plans, which might offer more long-term stability.

Forbearance can be a valuable tool for borrowers facing temporary hardship, but understanding the full terms of any agreement is essential before moving forward.