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Key Differences Between Forbearance and Loan ModificationWhen a borrower is defaulting or about to default on a loan, the lender can offer to modify the loan agreement to allow the borrower to repay the debt and avoid the consequences of violating the agreement. Loan forbearance is a tool that lenders and borrowers use to temporarily reduce or stop debt payments. The borrower agrees to repay the missed payments at a later date, with interest sometimes added. Forbearance is most often used when a borrower is going through a temporary financial hardship and anticipates being able to catch up on the payments once the hardship has passed. However, forbearance is different from loan modifications, and some of the differences can be advantageous to a lender.

Separate Agreements

With a loan modification, the lender and borrower are changing the original loan agreement to create a new repayment plan that the borrower can adhere to. Loan forbearance is creating a new agreement that temporarily supersedes the original loan agreement. The forbearance agreement should state:

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