Negative Consequences of a Forbearance
For many people, getting a forbearance on a loan is a necessary step in trying to balance a budget and keep up with a mountain of debt. With a forbearance, you can put off payments for a while due to certain hardships. It is a credible, and sometimes mandatory, way to manage your finances. However, a forbearance can have negative consequences for you despite the short-term relief that is promised.
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Definition of Forbearance
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A forbearance is an agreement between a lender and a borrower to postpone the payments currently due on a debt. Most commonly, this relates to the repayment of a significant note of debt such as a house, a car, or a student loan. The lender and borrower arrange to postpone or defer payments at the present if the borrower demonstrates a hardship towards making payments. The lender agrees to postpone the payments for a set period of time, after which the borrower would begin making payments again toward the outstanding debt.
Credit Rating Effects
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A forbearance may have some effects on your credit history. While it will prevent additional reporting of missed payments and past due notices, it may not automatically reverse previous reporting of bad debt. The terms of the forbearance could affect just payments going forward or be backdated to the point where you began to have difficulty paying the debt. If not done correctly, your credit could still accumulate negative ratings while you are in a forbearance attempting to fix it.
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Accumulated Principal
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A forbearance can be good to postpone payments until a time when you are in a better financial position to pay off the debt. However, during the forbearance, interest is still accumulating on the debt. When the forbearance ends, the total amount due will be slightly higher than it was at the beginning of the forbearance -- due to the accumulated interest and, possibly, the re-integration of past due payments back into the principal amount.
Future Borrowing
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Forbearance can also have a negative effect on your future borrowing opportunities. If you fail to honor the terms of your forbearance agreement (most notably, failing to make payments when the forbearance ends), then negative information will be transmitted again to credit reporting agencies. However, lenders now will see a continued trend of poor credit, and as such they will not be willing to offer any lending opportunities to you as a "high-risk" individual.
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References
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