Loan forbearance is a situation in which a lender allows a debtor to deviate from the payment plan described in the original terms and conditions of the loan, at least for a short period of time. During the period of forbearance, the lender does not make any attempt to collect the past due amount. However, should the debtor be unable to bring the account up to current status by an agreed upon date, the lender is free to pursue collection of the total loan amount.
Just about any type of loan is subject to forbearance. Banks and other lending institutions may grant this temporary financial arrangement on mortgages, car loans, and even student loans. As long as there is a reasonable expectation that the debtor will be able to bring the loan current within a specified period of time, most lenders will consider the possibility of forbearance.
There are a number of reasons why lenders choose to grant a loan forbearance. Often, the situation has to do with an unexpected change in the finances of the debtor. This may involve the loss of a job and an ensuing period of unemployment. During that time, the lender may choose to accept reduced monthly installment payments on the loan, or even grant a short period of deferment in which the debtor does not have to pay anything. In both cases, the expectation is that the debtor will recover financially within a given period of time, and bring the loan current.
Both lenders and debtors benefit from the utilization of loan forbearance. Debtors receive some short-term relief from the pressure of attempting to keep up a payment that can no longer be managed. During this period, the lender does not make any attempt to collect on the debt. Many lenders will not report the forbearance period to credit reporting bureaus, and continue to classify the debtor as being current, which means that the debtor’s credit report does not reflect a negative line item.
Lenders often avoid spending a great deal of time and expense in collecting the debt. Because the loan forbearance is a simple arrangement between the two parties, there is no need to utilize costly legal action. Choosing to grant a period of forbearance to a client who has remained current up to the point when the financial reversal occurred can actually save the lender money. As long as the debtor regains a firm financial footing and catches up the payments in accordance with the terms of the forbearance, the business relationship can continue to the mutual benefit of both parties.
It is important to note that not every debtor is automatically entitled to a loan forbearance. Lenders typically consider the specific circumstances that surround the situation. For example, if the debtor is habitually late with payments before the current financial reversal takes place, there is little chance that the lender will be open to the idea of reduced or delayed payments, even for a short period of time. By contrast, a debtor who has always paid on time and proactively contacts the lender as soon as the reversal takes place has a much better chance of receiving this type of temporary financial arrangement.
