Loan Agreements and Forbearance Agreements.

Loan Agreements and Forbearance Agreements.

A loan agreement is a contract that regulates the terms of a loan. Usually, they are related to loans of cash, but can also be associated with securities lending. Loan agreements can contain promissory notes. Usually, they are in written form, but there is nothing illegal about an oral contract. The agreement should be a formal document that evidences a loan. This document might include negative and positive covenants, value and type of collateral pledged, guaranties, financial reporting requirements, interest rates and few, and how the loan will be repaid and over how long a period of time.

There are different types of loan agreements. They are categorized according to type of lender, and type of facility. If the loan is categorized by lender, there are bilateral loans and syndicated loans. A bilateral loan is one between an individual and one lender. This is opposed to a syndicated loan, which is a loan between and individual and multiple lenders. If you categorize loan agreements by their type of facility, they break down into term loans and revolving loans. Term loans are paid in installments over their term. Revolving loans consist of a maximum amount that can be withdrawn at any time. Interest is paid on the monthly drawn amount.

Forbearance Agreements:

This is a term you may hear in the context of a mortgage process. Forbearance is an agreement between a lender and a borrower to delay foreclosure. Forbearance means “to hold back.” When borrowers have problems making payments, the lender will naturally begin the foreclosure process. However, to avoid foreclosure, the lender and borrower can agree to delay foreclosure if the borrower can catch up to his payment schedule by a certain time. Forbearance is usually used when the borrower is experience temporary financial problems. If the borrower has bigger problems, forbearance is not a likely solution.

Lenders use forbearance to avoid losing money. It is a way to take control of the situation in a way that will serve them the best. Other than postponing a payment, forbearance agreements can also be used to reduce or suspend payment. Any interest that accumulates during the suspension is still the borrowers responsibility.

A number of different factors determine whether or not forbearance is necessary including the severity and type of default and the lenders confidence. If a lender lacks confidence in a borrower and is interested in exiting the credit but is not interested in liquidating assets, they will view a forbearance agreement as the cleanest path to exit.

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