Forbearance

What is Forbearance?

Forbearance is a term that refers to the temporary reduction or postponement of payments, such as for loans or mortgages. It happens when the lender grants the borrower momentary relief from paying off their debt due to hardships such as unemployment, injuries, illnesses, or natural disasters.

If you are a borrower and seek assistance in financial hardship, you can consider options where you can request forbearance. Although forbearance allows you to pay off your financial obligations at a later date, you will still need to repay any reduced or missed payments in the future. Specific terms of payment relief, such as interest payments and the length of the loan, must be negotiated between the lender and borrower.

How Does Forbearance Work?

Missed payments can be added to the end of the loan’s repayment schedule. For example, if you have a monthly loan repayment schedule and your lender allows you to miss ten loan payments during the forbearance period, it means your loan will be extended by an additional ten months.

Alternatively, you may also be given the option to amortize postponed payments over the remaining portion of the loan. After the forbearance period is over, it means that your monthly loan payment will be higher than before to make up for the missed payments. Your loan will still be completely paid off at the end.

On the other hand, some lenders may also provide the option for you to do a balloon payment or a lump-sum payment. If you have any missed payments, you can pay them all at once at the end of the forbearance period.

Do I Qualify for Forbearance?

Depending on who your lender is, there may be standards that you need to meet or situations that you need to demonstrate before qualifying for payment relief, such as:

• Financial hardship: Layoffs, reduced income, or failure of a business
• Medical hardship: Serious illness or long-term disability
• Disaster: Natural disasters or life-threatening accidents
• Separation from a primary income earner: Divorce or death of a family member who is the primary income earner in the family

After determining your qualifications, you may also need to fill out an application. You are recommended to speak to your lender or service provider for additional details about the specific terms of the loan.

Different Types of Forbearance

1. Mortgage

Several payment relief options for mortgages are available, depending on your service provider. They may allow you to defer payments for a certain period of time or reduce your mortgage payments by a certain amount. However, one must consider the impact of extending your mortgage’s terms and how they affect your interest payments.

2. Student loans

Students who face difficulties in paying back their loans often apply for payment relief. Students who qualify for relief of payment should also consider the interest that will accrue on the loans.

3. Credit card

Some credit card companies are able to grant payment relief to consumers who are facing hardship. Examples of relief for credit card payments include postponing due dates for monthly bills, lowering minimum payment amounts, decreasing interest rates, or canceling late payment fees. The specific type of relief you can get depends on your credit card issuer and the type of card you own.

Benefits and Risks of Forbearance

Forbearance gives borrowers a chance to pause payments for loans, mortgages, or credit cards, helping borrowers avoid defaulting on their loans. It is more beneficial to request payment relief rather than risk defaulting on loans because forbearance does not impact your credit score, whereas default would cause a negative impact.

Forbearance also means that you can avoid foreclosure for your inability to pay missed loan repayments so that you can prevent your personal assets from being seized by your lender during the period for payment relief. It also allows you to pay more critical expenses, such as rent, utilities, or medical fees.

However, there are also risks in the borrower’s inability to satisfy the terms of forbearance, negatively impacting their credit score. Additionally, the payment relief period will continue to accrue even more interest that is to be paid after the period is over. The accrual of interest will be added to your existing balance, which may cause even greater financial hardship.

More Resources

CFI is the official provider of the Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst. If you would like to continue learning and developing your knowledge of financial analysis, here are additional resources:

• Amortization Schedule
• Deferment Period
• Foreclosure
• Debt Schedule
• See all commercial lending resources
• See all commercial real estate resources