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A forbearance, in terms of loans, is an agreement that occurs between a lender and a borrower who has defaulted on a loan. This agreement basically says that the borrower has extra time to get back on schedule with payments, and during this time the lender agrees that they will not take any legal action against the borrower, such as foreclosure on a property involved in a loan. During this time period, the borrower can pay a reduced monthly amount on their loan, or nothing at all. A forbearance may occur in any type of loan, and even sometimes in a loan with a strict payment agreement, depending on the circumstances of the default.
It is important for a borrower to know what kinds of forbearance agreements are available upon taking out a loan. Even those with excellent credit histories have a potential for financial hardship where they may end up being delinquent on their loans. Some types of loans, such as student loans, have a higher rate of defaults then others, and creditors are usually more prepared for dealing with these accounts in terms of pre-written forbearance agreements. A forbearance agreement may allow a borrower to make smaller monthly payments, as well as possibly stopping payment altogether for a period of time until normal payments may resume.
Most of the time, a forbearance will come at a cost to the delinquent borrower. The agreement may stipulate a higher interest rate, or there may even be monetary penalties written into the original loan agreement. The monthly interest will usually still accrue, as well. For those who cannot recover, the penalty will be dictated by the type of loan. A home can be foreclosed, a car repossessed, or the money owed can be handed over to a collection agency at an even higher cost to the distressed borrower.
Student loan forbearances are particularly common because a student has dropped out, cannot find a job upon graduation, or finds a job that does not pay enough money to cover his or her monthly loan payment. In the case of federal student loans, a forbearance will usually be granted to the borrower for one to three years. The interest rate of a student loan will usually not be affected by a forbearance.
Mortgage forbearance and their respective agreements can be much more complicated. Most of the time, a mortgage forbearance is only a short-term solution to monetary problems that have stemmed from issues such as health problems or temporary unemployment. Most of the time, home buyers will seek a solution other than forbearance to solve their problems. This is especially true when they have an adjustable rate mortgage whose interest rate has inflated to such a high amount that the monthly payment is simply too big to make anymore.
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