Forbearance is a temporary agreement between a lender and a borrower to pause or reduce loan payments for a defined period, typically granted when a borrower is experiencing short-term financial hardship such as job loss, illness, or a natural disaster. Interest generally continues to accrue during forbearance, and the borrower is expected to repay the paused amount once the forbearance period ends.
Introduction to Forbearance
Forbearance exists to give borrowers breathing room during a temporary financial setback without immediately pushing the loan into default. It is one of the most commonly used hardship tools across mortgage, auto, student loan, and small business lending, and became especially prominent during the COVID-19 pandemic, when federal programs required mortgage servicers to offer forbearance to affected borrowers. Because forbearance is meant to be short-term, lenders typically grant it for a set period — often one to twelve months, depending on the product and the reason for hardship — rather than indefinitely.
How Forbearance Works
A borrower requests forbearance from their lender or servicer, usually by documenting the hardship, though some programs allow self-certification. If approved, the servicer suspends or reduces required payments for the agreed period. Interest typically continues to accrue on the outstanding balance during forbearance, meaning the total amount owed grows even though no payments are being made. At the end of the forbearance period, the borrower and servicer agree on how the missed payments will be repaid — common options include a lump-sum repayment, a repayment plan that adds a portion of the missed amount to future payments, a loan modification that extends the term, or in some cases deferring the missed payments to the end of the loan. Servicers must clearly disclose which repayment option applies, since this materially affects the borrower’s future payment obligation.
Example
A borrower who loses their job requests forbearance on their auto loan. The lender pauses payments for three months. At the end of the forbearance period, the borrower has resumed employment, and the servicer adds the three missed payments to the end of the loan term rather than requiring an immediate lump-sum catch-up payment.
Risk Management
Forbearance protects both the borrower and the lender’s asset — it keeps the loan out of default status and preserves the relationship, but it defers risk rather than eliminating it. Lenders need clear policies on eligibility, maximum forbearance duration, how interest accrual is handled, and what repayment options are offered at the end of the period. Loan management systems must be able to correctly suspend payment due dates and delinquency reporting during the forbearance window while still accruing interest accurately, then transition the loan cleanly into whatever repayment arrangement follows.
Bottom Line
Forbearance is a temporary bridge, not a permanent fix — it pauses payments during a short-term hardship while the underlying obligation continues to accrue, with the borrower and lender agreeing upfront on how the paused amount will eventually be repaid.
