What Are Forgivable Loans?

by Om Paramapoonya

A forgivable loan carries both the carrot of forgiveness and the stick of responsibility. It is similar to a traditional grant with strings attached. Although the possibility of having a loan forgiven may sound charitable, it is by no means an easy giveaway. Some say it's a dirty ploy, yet others regard a forgivable loan as a powerful incentive that motivates the borrower to perform and achieve her goals.

Definition

A forgivable loan contract requires the borrower to follow certain restrictions and achieve certain milestones within a set period of time. If all the requirements are met, the loan provider will either pardon a portion of the loan or convert the entire loan into a grant. Failure to meet the terms of a forgivable loan contract will result in an obligation to pay back the loan, usually with interest.

Development Loans

Many state governments have offered forgivable loans to large and small businesses as a way to expand local employment and economy. When those businesses succeed, the states are paid back indirectly through the increase in tax revenue, jobs and investment. In 2011, for example, the Connecticut government offered a forgivable loan to ESPN, a sports broadcaster, under the condition that if the company created 800 new jobs within 10 years, the entire loan would be forgiven.

Housing Loans

Several state and federal housing programs offer forgivable loans to homeowners whose properties are in need of repair. Oftentimes, they are only available to low-income homeowners, senior citizens, rural residents and those with disabilities. If a borrower complies with all the housing restrictions and remains on his property for a set period, the loan will be pardoned. If he fails to follow the restrictions or sells the property before the required occupancy period is complete, he must pay back the loan in full or at least a portion of it.

Employee Incentives

Highly skilled employees are vital to the success of a company, yet it can be difficult for business owners to attract and retain top talent. Some companies use forgivable loans to bring in and pin down key employees. In this case, a forgivable loan is used much like a signing bonus or a performance bonus. If the employee remains employed by the company, the loan will be pardoned over the life of the contract. If the employee quits before fulfilling the terms, he must repay the loan balance, with interest and penalties as established in the loan agreement.

About the Author

Om Paramapoonya holds a Master of Arts in creative writing from California State University, Sacramento. She has been an online writer since 2008. Healthy cooking is her expertise, but she also writes on other topics including fashion, travel, home decor and personal finance.

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