Loan Forbearance: Meaning, Pros, Cons & How to Apply

Loans have become easy to borrow, thanks to online processes, minimal documentation, and quick approval. However, repayment can become difficult due to unforeseen circumstances such as job loss, illness, or other financial setbacks. In such cases, loan forbearance can provide much-needed relief. This article will help you understand the meaning of forbearance, how to apply, and the pros and cons of this option.

What is Forbearance?

Forbearance is a temporary pause or reduction in loan payments, usually granted when a borrower faces financial hardship. It prevents loan default or foreclosure, providing a vital breathing space for the borrower to recover.

While forbearance is typically applied to mortgages, it can also be requested for Personal Loans and Business Loans. During forbearance, the borrower doesn't have to make regular payments for a period, but interest may continue to accrue on the outstanding balance.

How to Apply for Forbearance?

Forbearance is not a fully automated process. You need to reach out to your lender personally or by phone, email, or online form. Here’s how you can apply for forbearance:

1. Contact your lender: Start by reaching out to your lender via phone, email, or their online form.
2. Provide your loan details: Mention your loan account number and the reason for your request.
3. Explain your hardship: Clearly state the reason for your financial difficulty, such as job loss or medical emergencies.
4. Discuss repayment options: Inquire about the terms and repayment schedule after the forbearance period.

It's essential to understand the consequences and terms of the forbearance before agreeing to it.

How Do I Qualify for Mortgage Forbearance?

To qualify for mortgage forbearance, the following circumstances typically make you eligible:

• Medical Issues: Long-term disability or serious illness.
• Financial Crunch: Reduced income due to job loss, business failure, etc.
• Natural Disaster: Impact of natural disasters, accidents, or pandemics.
• Separation: Loss of an earning family member or divorce.

Each lender has its own eligibility criteria, so it’s essential to discuss these options directly with them.

Pros & Cons of Forbearance

While forbearance is a helpful tool, it’s important to weigh its benefits and drawbacks before opting for it.

Pros:

• Temporary Payment Relief: Allows you to pause or reduce payments during financial hardship.
• Prevents Loan Default: Avoids the immediate repercussions of loan default, such as foreclosure.
• Protects Credit Score: Helps you maintain your credit rating while you recover financially.

Cons:

• Accrued Interest: Even though payments are paused, interest may continue to accrue on the outstanding balance.
• Extended Repayment Period: Forbearance may extend the term of your loan, resulting in higher overall payments.
• Impact on Refinancing: Forbearance can make it harder to refinance loans in the future as many lenders require a history of on-time payments.

Will Forbearance Affect Refinancing?

Forbearance can affect your ability to refinance, as many lenders require a clean payment history. If you’ve gone through forbearance, your lender may hesitate to refinance your loan. To improve your chances of refinancing after forbearance:

• Avoid Using Credit Cards: Keep your credit utilisation rate low.
• Maintain a Positive Employment Record: Secure employment at a stable organisation.
• Review Refinancing Options: Talk to your lender about refinancing opportunities after the forbearance period.

How Do I Get Out of Forbearance?

Once the forbearance period ends, you don’t need to repay the missed payments in a lump sum. There are several options to get out of forbearance:

• Lump-Sum Payment: You can pay the missed payments in one go.
• Revised Repayment Plan: Spread the missed payments across future instalments.
• Deferral: The missed payments are added to the end of the loan term, extending the repayment period.

You should discuss your options with your lender to find the best approach based on your financial situation.

What Happens After Forbearance Ends?

When the forbearance period concludes, you must resume regular payments. Depending on your agreement, you might be required to make up the missed payments in a lump sum or through a revised payment plan.

• Reinstatement: Paying all missed payments at once.
• Repayment Plan: Spreading the missed payments across future instalments.
• Loan Modification: Negotiating a new repayment schedule with the lender.

Conclusion

Forbearance can be a valuable tool to temporarily ease the burden of loan repayments. However, it's crucial to understand its terms, including the potential impact on your credit score, refinancing options, and long-term repayment. If you meet the criteria for forbearance, reach out to your lender to request relief and make a plan to recover financially.

Frequently Asked Questions

1. What is forbearance used for?

Forbearance allows you to temporarily pause your loan payments when you are unable to pay due to financial difficulty. However, the interest will continue to accrue on the balance.

2. What is the difference between forbearance and deferment?

Forbearance temporarily pauses your loan payments while interest accrues. Deferment, on the other hand, suspends both payments and interest accrual.

3. What is the difference between delinquency and forbearance?

Delinquency occurs when you fail to make payments as per the loan terms, while forbearance is a request to temporarily halt payments due to financial hardship.