A forbearance agreement is an agreement between a borrower and a lender that provides the borrower with temporary relief from making payments on their loan. This agreement is often used in situations where the borrower is experiencing financial hardship and cannot make their payments.
If you are considering a forbearance agreement, it is important to understand the terms of the agreement. Here are some key terms that you should be familiar with:
1. Forbearance period: The forbearance period is the length of time during which the borrower is allowed to skip payments. This can range from a few months to a year or more.
2. Interest accrual: Interest will continue to accrue on the loan during the forbearance period. This means that the borrower will have to pay more in the long run, as the interest will be added to the principal balance of the loan.
3. Repayment plan: At the end of the forbearance period, the borrower will be required to repay the missed payments. This can be done through a repayment plan, which is a schedule of payments that the borrower agrees to in order to catch up on their missed payments.
4. Credit score impact: Entering into a forbearance agreement can have a negative impact on the borrower`s credit score, as it is a sign that the borrower is struggling to make their payments. However, if the borrower makes all of their payments on time after the forbearance period ends, their credit score should recover over time.
5. Other options: A forbearance agreement is not the only option available to borrowers who are struggling to make their payments. Other options include loan modification, refinancing, and debt consolidation.
Understanding the terms of a forbearance agreement is crucial for borrowers who are considering this option. By understanding these terms, borrowers can make informed decisions about whether a forbearance agreement is the right choice for them.