Understanding the relationship between a lender and a borrower is really quite simple. You may find at some point in your life that you would like to buy a house or car that you don’t quite have all the money for upfront. A lender may find that they have enough money to purchase said house or car and would love to make a profit from their money. The borrower and lender then get together and discuss the terms that are in favor of both parties involved. These terms may sound a little like: the borrower getting the house or car upfront even though the borrower does not have the money–and the lender getting a small monthly fee (interest) until the borrower can pay back the balance borrowed (loan).
The important thing to remember is that lenders don’t actually want you to default on your loan with them. They want nothing more than you to pay them in full. In your luck, they don’t mind helping you make sure you stay current. I can assure you that most lenders are not in the business of owning your home or car. They actually make their money when a borrower pays them.
Regardless of how long it takes you to pay this debt, life is still happening around you: career changes, lay-offs, new additions to your family, repairs, and health concerns. Some of these things are unpredictable and unexpected but more importantly, they cost! It’s never a good feeling when you discover that you’ve somehow come up short for a bill. It helps to know that you have the option of a loan modification.
Let’s talk about what a loan modification is. A loan modification is a formal agreement between a lender and a borrower. This agreement will modify or amend a pre-existing loan agreement/contract. When modifying a loan, a borrower may ask to lower the interest rate, monthly payment, principal balance, or all three. This is actually making a new contract to replace the first one.
Loan modifications are designed to offer the ability to adjust the terms of a loan and hopefully make it more affordable to prevent defaulting. Making sure you call your lender as soon as possible would be best. The longer a borrower is in default, the less likely a lender will be able to consider this option.
Most lenders do not charge a fee for loan modifications. Keeping a homeowner in their home cost significantly lower than for a lender than a foreclosure. Keeping a car owner in their car costs less than the repossession and resale of a vehicle. You may request a loan modification more than once, although too many requests may result in denial.
Before calling a lender, be prepared to explain:
- The hardship or reason you can’t pay
- Your current income if any
- Your prospects for any future income
- Any other obligations that you must fulfill as well (any other bills)
- Your plans to bring your debt with the lender back current (this should include how much you can afford to pay monthly)
- Be sure not to agree to any plans/agreements that you cannot afford to pay
- Remember to remain calm – You will get nowhere if you lose your temper.
Some questions you may want to ask your lender include:
What are my options?
After explaining your hardship, ask your creditor what options you may have available.
Am I able to refinance the loan to extend the term or lower the interest rate to create a smaller monthly payment?
This allows you to pay the lesser amount monthly by completing a refinance of the old loan and creating a new loan with new terms.
Am I able to defer a payment or few, until my expected income comes in?
Deferring a payment is not necessarily “getting rid” of a payment. It simply means can you push a few payments to the back of my loan, which in time will extend the term but offer immediate relief of payments. In other words, “Can I pay it later?”
Am I able to only pay interest and defer the principal balance?
Some lenders will allow you to pay off the interest monthly and leave the principal balance the same. This way you are current, you are still paying the interest to the lender for the loan, but your balance owed stays the same. Paying only the interest monthly will lower the monthly amount you pay until you are able to contribute to the interest and principal.
Do you have a hardship plan?
Some lenders may have a hardship plan where they lower the interest rate, monthly payment, and forgive fees. Be sure to ask if your lender has one. With a hardship plan, there is typically no penalties as long as you follow through with the guidelines being provided.