Common Forbearance Options
Forbearance is support that a lender can provide to customers to assist them in a period of financial difficulty. Most forbearance is designed to be temporary in nature.
It is important to understand that while forbearance is meant to provide temporary support to help you get your finances back on track, there are potential costs and other considerations you should be aware of. If the amount you pay in a month is less than your normal monthly installment, your total loan costs will increase as the amount you borrowed will be outstanding for a longer period of time (even if the loan is repaid within the original term).
Step One will work with each customer to assess their circumstances and tailor our support accordingly. A few common forbearance tools are detailed below, with a summary of the potential benefits and considerations of each. This list is not exhaustive, and some options may be used as a standalone form of assistance or in a combination, depending on your individual circumstances.
Any calculations or figures below are presented as an illustration only.
Please note that discussing available forbearance options will not have a negative impact on your account or the data reporting to the Credit Reference Agencies. Only your actual payment history and the loan balance are reported. If you are experiencing financial difficulties or struggling to make your payment, it is always better to contact us to discuss your circumstances to determine what forbearance support may be available and appropriate.
Additionally, a number of free advice services are available across the UK from whom you can find help in a way that best suits your situation. We have compiled a list of service providers that can assist with a wide range of circumstance. Click here for details.
This is a temporary reduced payment concession where you pay only the interest arising on your loan and not the usual capital component. This temporary concession will result in a lower monthly payment amount which can help when you are having difficulty paying your full installment each month.
It is important to understand that while this type of arrangement can temporarily reduce the amount you pay each month and prevent your loan balance from increasing, it will cause arrears to accumulate on your account (because you are paying less than the full amount due). This may be reported to the Credit Reference Agencies and have a negative impact on your credit rating. You should also consider that your total loan cost will increase, and the payment you need to make after your temporary interest-only period will increase so that your loan can be repaid within the originally agreed loan term.
As an illustration, assume a customer that originally borrowed £25,000.00 over 20 years (240 months) at an interest rate of 8.9% has an initial monthly payment of £223.33. If, at the beginning of month 30, they needed a temporary interest-only payment concession for 3 months, it would reduce the monthly amount paid to £176.36 for a period of 3 months, and the loan balance would stay constant at £23,778.47. At the end of the 3-month period, in order to fully repay the loan by the end of the original 20-year term, the monthly payment would need to increase to 224.67. Additionally, the total interest charged would increase by £138.07 over the term of the loan.
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Similar to a temporary interest-only reduced payment concession but where the amount you pay is less than the interest arising on your loan. Consistent with any reduced payment concession, this temporary arrangement will result in a lower monthly payment amount, which can help when you are having difficulty paying your full installment each month. However, if the payment amount is less than the interest arising on your loan each month, your loan balance will increase.
It is important to understand that while this type of arrangement can temporarily reduce the amount you pay each month, it may not prevent your loan balance from increasing. Arrears will accumulate on your account (because you are paying less than the full amount due) which may be reported to the Credit Reference Agencies and have a negative impact on your credit rating. As with all temporary reduced payment concessions, you should also consider that your total loan cost will increase and the payment you need to make after your concession ends increases to allow your loan to be repaid within the originally agreed loan term.
As an illustration, assume a customer that originally borrowed £25,000.00 over 20 years (240 months) at an interest rate of 8.9% has an initial monthly payment of £223.33. If, at the beginning of month 30, they needed a temporary reduced payment concession for 3 months where the monthly amount paid is reduced to £50.00 for a period of 3 months, at the end of the concession period, the loan balance would increase from £23,778.47 to £24,160.36. At the end of the 3-month period, in order to fully repay the loan by the end of the original 20-year term, the monthly payment would need to increase to £228.28. Additionally, the total interest charged would increase by £509.51 over the term of the loan.
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A loan term extension is where the remaining amount of your loan balance is repaid over a longer period of time than the original loan maturity date. By spreading your payments over a longer period, the amount you pay each month will be reduced, but the total cost of borrowing will increase. A loan term extension may be helpful to clear an outstanding arrears balance over time when you are unable to afford more than your standard monthly payment.
A loan term extension may not be appropriate if the extended term will go beyond your intended retirement age, and you should consider how you will support making the loan payments for a longer period. It is important to understand that this type of arrangement will increase the total cost of borrowing. Additionally, if you have an outstanding arrears balance, it will continue to be reported to the Credit Reference Agencies for a longer period which can have a negative impact on your credit rating.
As an illustration, assume a customer that originally borrowed £25,000.00 over 20 years (240 months) at an interest rate of 8.9% has an initial monthly payment of £223.33. If, at the beginning of month 30, they wanted to extend their term so that the monthly payment would only be £215.00 each month, the total loan term would extend by 22 months, and the total interest charged would increase by £2,815.22 over the term of the loan.
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Once your finances are back on track, an arrangement to pay is an agreement where you make a monthly payment greater than your normal monthly installment amount to clear any outstanding arrears and costs so that your loan will be fully repaid within the agreed term. Depending on your circumstances, it is usually in your best interest to clear any arrears balance as quickly as you are able. Still, an arrangement can also be set to spread any outstanding arrears and costs over the remaining loan term if necessary.
In order to agree a formal arrangement to pay, we will conduct an assessment of your financial circumstances to confirm that the agreed payment amount will be affordable. If you are unable to provide the information required for this assessment, it is still in your best interest to make the payments that you believe are affordable, as any reduction to an outstanding arrears balance will help reduce your total loan cost and help improve your credit rating.
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