What is Loan Forbearance?
Loan forbearance is a temporary pause or reduction in your loan repayments. It’s offered by lenders as a way to help borrowers facing financial hardship. For example, if you’ve lost your job or had a medical emergency, forbearance can provide some short-term relief. However, it’s important to note that forbearance isn’t a free pass, and interest will still accrue on your loan during this time.
Loan forbearance isn’t the same as loan modification or refinancing. Loan modification involves permanently changing the terms of your loan, such as the interest rate or repayment term. Refinancing involves taking out a new loan to pay off your existing one, often at a lower interest rate. Forbearance is just a temporary solution, but it can provide some breathing room if you’re facing short-term financial difficulties.
Advantages of Loan Forbearance
Here’s a breakdown of some key advantages of loan forbearance:
- Immediate Financial Relief: Forbearance provides a temporary break from your regular loan repayments. This can ease your short-term financial burden and free up some cash flow during a difficult time.
- Credit Score Protection: By suspending or reducing your repayments, forbearance can help you avoid missed payments or defaults that could damage your credit score.
- Recovery Time for Borrowers: Forbearance offers a chance to get back on your feet financially. With the pressure of repayments on hold, you can focus on resolving your temporary hardship and developing a plan to catch up on any missed regular payments later.
- Avoidance of Foreclosure or Default: In some cases, forbearance can prevent a more serious situation like foreclosure on a mortgage. By working with your lender, you can explore ways to manage your loan and potentially avoid the risk of losing your property.
Make sure you discuss the terms and conditions of forbearance carefully with your lender before entering into an agreement.
Disadvantages of Loan Forbearance
While forbearance can provide temporary relief, it’s important to be aware of the downsides before entering into an agreement with your lender. Here are some key things to consider:
- Accrual of Interest: Interest continues to be charged on your loan even during forbearance. This means the total amount you owe will increase during this period of time.
- Future Repayment Challenges: Resuming repayments after forbearance can be tricky. Your monthly loan payments might be higher to compensate for the missed payments, or your loan term might be extended. This could put a strain on your budget once you’re back on your feet.
- Negative Impact on Future Borrowing: Forbearance can make it harder to qualify for new loans in the future, as some private lenders view it as a sign of financial difficulty.
- Misunderstandings and Mismanagement: It’s crucial to understand the terms of your forbearance agreement completely to avoid any surprises. Make sure you know exactly how much interest will accrue and what your repayment options will be after the forbearance period ends.
Eligibility and Application Process for Loan Forbearance in Australia
The specific requirements might vary depending on your lender, but here’s a general idea:
Eligibility Criteria
- Financial hardship: This could be due to job loss, illness, unexpected expenses, or other situations that temporarily impact your income.
- Type of loan: Some loan types, like mortgages, might have specific hardship programs offered by the government during emergencies.
- Repayment history: A good history of making repayments on time can strengthen your case for forbearance.
Application Process
- Contact your lender: The first step is to speak directly to your loan provider. Explain your situation and enquire about their hardship or forbearance programs.
- Provide documentation: Be prepared to document your financial hardship. This might include pay slips, bills, or evidence of medical expenses.
- Negotiate terms: Discuss the terms of forbearance with your lender, such as the duration of the forbearance period and any potential changes to your loan repayments after the program ends.
Remember:
- Forbearance isn’t automatic, and approval depends on your lender’s assessment.
- Interest will still accrue on your loan during forbearance, so the total amount you owe will increase.
It’s important to act early and communicate openly with your lender if you’re facing financial difficulty. They may be able to offer alternative solutions or guide you through the forbearance application process.
Alternatives to Loan Forbearance
Here are some alternatives to consider if you’re facing financial hardship in Australia:
- Financial Hardship Programs: Many lenders in Australia offer financial hardship programs specifically designed to help borrowers struggling to meet repayments. You may want to check out Citi’s or CommBank’s financial hardship programs. These programs may offer reduced repayments, fee waivers, or extended loan terms.
- Loan Restructuring: Negotiate with your lender to restructure your loan. This could involve extending the loan term, which would lower your monthly repayments but increase the total interest paid over time.
- Loan Refinancing: Depending on your situation, you might be able to refinance your loan with a different lender offering a lower interest rate. This can potentially reduce your monthly repayments.
Interested to know more about loan restructuring and loan refinancing? We have written a whole article dedicated to it which you can read here: Loan Refinancing vs. Restructuring
Making an Informed Decision
It’s important to understand the long-term implications of loan forbearance before applying to avoid more future financial distress. Here are some key factors to consider:
- Impact on your financial goals: Forbearance can delay your progress toward financial goals like saving for a house or retirement.
- Interest accrues: Interest will still be charged on your loan even during forbearance, increasing the total amount you owe.
- Long-term affordability: Make sure you can afford monthly payments after the forbearance period ends. You might need to adjust your budget significantly.
- Review the agreement carefully: Understand the terms of the forbearance agreement, including the duration and repayment plan after the forbearance period.
Financial advisors or counsellors can guide your specific situation and help you explore all your options. They can also help you negotiate with your lender for a more permanent solution that works for you.
Loan forbearance can provide temporary relief from loan repayments during financial hardship, but it’s important to weigh the pros and cons carefully. While it can ease immediate pressure and protect your credit score, interest accrues and future repayments might be higher. Exploring alternatives like financial hardship programs, loan restructuring, or refinancing might be better long-term solutions. It’s always best to get free financial advice or legal guidance to understand all your forbearance options before making a decision and consider how forbearance might impact your financial goals.
