The 21-year-old spent the first half of the 2023-24 campaign on loan at Granada, representing the Spanish side on 14 occasions in all competitions, before moving to Benfica on loan in the middle of January.
The Eagles would have been committed to paying €6m (£5.1m) for the defender if he started 50% of their matches between his arrival and the end of the campaign.
Fernandez has played less than expected for the Portuguese side, featuring only 13 times, and just two of his six appearances in the Primeira Liga have come from the first whistle.
However, according to Manchester World, Benfica are still planning to bring him to the club on a permanent basis and are willing to pay the €6m (£5.1m) initially agreed.
Alvaro Fernandez 'set for summer move to Benfica'
The report claims that Benfica 'have been encouraged' by Fernandez's performances, and he is now expected to move to the Portuguese team on a permanent basis.
Man United also allegedly have a buyback option and sell-on clause amid claims that Benfica could attempt to move him on shortly after signing him on a long-term deal.
Fernandez has not made a first-team appearance for the 20-time English champions, but he excelled during a loan spell at Preston North End during the 2022-23 campaign.
Left-back has been a problematic position for Man United this season, with Luke Shaw spending long periods out with muscular issues, while Tyrell Malacia has not played in 2023-24 due to a knee injury which has required two separate operations.
Man United 'expected to sign a left-back this summer'
Man United are said to be planning to move for a young left-back during this summer's transfer window.
There are four left-backs on the books at Old Trafford, but Shaw and Malacia are both injured, while Fernandez and Brandon Williams are out on loan.
Shaw's constant muscular issues are said to be concerning Man United, which will lead to the club to signing another player in that area of the field this summer.
Victor Lindelof has also been used as a left-back this term, but he is currently injured, while neither Aaron Wan-Bissaka nor Diogo Dalot have convinced in that area of the field.