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loan forbearance

Loans have become extremely easy to borrow. Thanks to online loan procedures, easy eligibility conditions, minimal documentation requirements, and instant Personal Loan approvals. However, the real challenge comes when it’s time to repay the EMIs.

Sometimes, even though you choose a loan term with budget-friendly EMIs, the repayment becomes difficult due to situations like job loss, the demise of an earning family member, divorce, medical emergency, etc. In such circumstances, you can request forbearance from your lender.

In the following sections, you will understand what is the meaning of forbearance, how to take advantage, and its pros and cons.

What is Forbearance?

First, it is essential to understand the meaning of forbearance. It refers to a temporary pause in loan payments, typically in the case of mortgage loans. Creditors allow forbearance as an alternative to foreclosure or loan default. If you have borrowed a loan and are unable to pay its EMIs, most lending institutions will be willing to give you a chance to repay rather than taking the extreme step of foreclosure. If you have a genuine reason to request forbearance and the financial crunch is temporary, the loan company will most probably allow loan forbearance.

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How to Apply for Forbearance?

Loan forbearance is not an online process. You must contact your lender over the phone or personally to request a forbearance. In most cases, they will understand your need to postpone payments, such as a financial crunch associated with job loss or illness. Follow these steps to apply for forbearance:

  • Contact your lender over the phone, email, or through an online form to request forbearance.
  • Provide the loan account number to specify which loan you are talking about.
  • Give them a reason for your financial difficulty.
  • Mention a timeline by which you can recover your finances.
  • Don't forget to ask about the terms and consequences of forbearance to make an informed decision.
  • If the lender is convinced, they will offer you help to a certain extent.

Remember, you have higher chances of availing of forbearance if you have a consistent repayment history and responsible credit behaviour.

How Do I Qualify for Mortgage Forbearance?

Depending on your lender’s policy, there are certain standards you must meet to qualify for loan forbearance. Here are a few:

  • Medical Issues: Long-term disability or severe illness
  • Financial Crunch: Reduced income, job loss, business failure
  • Disaster: Natural disasters, life-threatening accidents, pandemics
  • Separation: Demise of an earning family member or divorce

You can apply for forbearance if you are facing financial difficulty due to any of these reasons. Speak to your loan company's representative to understand the process when forbearance is allowed.

Forbearance Pros & Cons

Although forbearance is beneficial when you have temporary financial difficulty, it has some drawbacks. Let's look at the pros and cons of loan forbearance:

Loan Forbearance Pros Loan Forbearance Cons

Pauses loan EMIs repayments for a certain time, making financial management easier until it comes back on track

Does not provide any concession on the outstanding loan amount or interest rate

Protects against foreclosure or the consequences of loan default

Interest keeps accruing during the forbearance period

Gives sufficient time to repay the loan without attracting collection or legal action

Ultimately increases the total loan cost

Saves your credit score from diving down

Loan default after forbearance brings the credit score down

Will Forbearance Affect Refinancing?

Sometimes, when you know what loan forbearance is, your finances may not come back on track even after the forbearance period is over. In that case, one option is to refinance the loan. Most loan companies may not trust you to make timely repayment after forbearance, making refinance inaccessible. Here are a few tips to increase your chances of refinancing after forbearance:

  • Avoid credit card usage to keep your credit utilisation rate low.
  • Retain old accounts to prolong your credit history and keep their credit limit.
  • Get employment at a reputable organisation to impress lenders and make timely repayment.
  • Contact the lender and enquire about your refinancing options.

How Do I Get Out of Forbearance?

Once the forbearance period ends, you don't need to repay the missed EMIs in a lump sum. These are the common ways to get out of forbearance:

  • Lump Sum Payment: One trick is to repay the missed loan payments in a single lump sum and refinance the outstanding balance.
  • Revise the Repayment Plan: Split the missed payments and spread them out over a certain period. It will make repayment easier, increasing your chances of refinancing.
  • Deferral: If the cash flow is insufficient, you can tack the missed payments to the term end and extend it by a few months.

Conclusion

Now that you know what forbearance means, approach your lender and request it to make repayment easier and more manageable. If you fulfil their Personal Loan requirements and maintain a consistent repayment history, you will most likely qualify for a loan forbearance and pause repayment until you get out of the financial crunch. It is a much better option than loan default or foreclosure.

Frequently Asked Questions

1. What is forbearance used for?

When you are not able to pay your loan EMIs on time, you can request a forbearance from your lender. It will temporarily pause the payments for some time, but the interest will keep accruing on the outstanding balance.

2. What is forbearance vs deferment?

Loan forbearance refers to pausing the loan payments temporarily. However, the loan balance continues accruing interest. On the other hand, loan deferment temporarily halts the loan payments without letting the interest accrue.

3. What is the difference between delinquency and forbearance?

Delinquency occurs when you fail to repay your EMIs on time. Forbearance occurs when you request your lender to pause the repayment for a while since you are unable to pay your EMIs.


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Did You Know

Disbursement

The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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