Forbearance is the act of delaying the enforcement of a right, obligation, or debt. In finance, it commonly refers to a temporary postponement or reduction of loan payments, like those for mortgages or student loans, and is granted by lenders to borrowers facing financial difficulties. It serves as an alternative to foreclosure or default, providing borrowers with temporary relief while allowing lenders to still receive payments in the future. Forbearance agreements are negotiated between the borrower and lender, with terms varying from full payment suspension to reduced interest payments. Borrowers typically need to demonstrate financial hardship, such as job loss or major illness, to qualify.
Forbearance can be beneficial for both parties involved. Borrowers can focus on immediate financial needs, like housing or medical emergencies, and avoid major financial consequences like bankruptcy or eviction. Lenders can maintain contact with borrowers, increasing the chances of repayment and improving customer experience. While it provides temporary relief, forbearance is not loan forgiveness. Borrowers are still responsible for repaying the debt, including any accrued interest, though the specific repayment terms are negotiated. At the end of the forbearance period, the loan typically reverts to its original form.
