Forbearance

What Is Forbearance?

Forbearance refers to a provision by which loan repayments for mortgages or student loans are postponed avoiding the possibility of default or, possibly, foreclosures. Companies that hold loans are usually open to discussing terms about forbearance when the debtors start experiencing difficulty in making payments, and it is brought to their notice. This is because they incur huge losses when defaults or foreclosures must occur.

Deeper Definition

Forbearance is an option to be taken up in any loan, although it is used majorly in the case of student loans and mortgages by which debtors are granted an extension to repay their debts. Borrowers and lenders usually agree on terms that are premised on the willingness and ability of the borrower to continue making payments once the forbearance period is over. The agreement is usually made once the borrowers alert the lenders of their inability to meet the payments. Since they are aware of the potential losses they could incur, they try to bear with the borrowers, who usually manage the impact of a major illness or job loss. The agreements are usually made such that there could be total or partial reduction depending on the borrower’s financial state and the lender’s assurance of their ability to repay once the period elapses. 

There are also provisions, in some cases, where the borrower can be granted a full moratorium on making payments for some time, those by which interest payments will be required of the borrower. Still, the principal is temporarily overlooked, and those by which the borrower pays a fraction of the interest. In contrast, the balance on the payment is added to the previous debt (negative amortization). In certain special cases, they could be enforced legally due to general health or natural disaster challenges. For instance, the impact of the COVID-19 pandemic on the economy has necessitated the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Forbearance Example

If an individual senses that they would be unable to meet up with their loan repayments, it is not out of place for such an individual to demand an extension granted for the loan repayments to be made, known as forbearance.