Loans play an integral role in our society. Institutions front people with money to help them secure assets and necessities to help them prosper day-to-day and build the lives they want and need. However, the loans will need to be paid back and oftentimes we bite off a bit more than we can chew or we need to adjust our finances to open new doors.
Whether you want to lower monthly payments to free up cash flow or are feeling overwhelmed by the debt and need some breathing room, loan modification is an important option to get your finances on track. It’s important to understand the different terms you’ll hear related to changing the details of your loans and how loan modification differs from others.
Loan modification vs. refinancing or consolidation
A loan modification is different from refinancing or consolidating a loan. Instead of completely scrapping the agreement and taking on a new loan from either the same or another lender, you’re just negotiating a change to the original terms of your loan.
Refinancing is often used to take advantage of home equity to improve your home or buy other big-ticket items such as vehicles. Consolidation is often a way to simplify several loans into one, often with a lower interest rate.
Loan modification can accomplish many of these goals, but it’s generally from a more pressing need such as missed payments, change in financial circumstances, and overall financial hardship. Another key difference is that loan modifications don’t require you to qualify beyond proving financial hardship. Refinancing and consolidating may require a high credit score and a good relationship with the lenders whereas modification is just a negotiation between you and the lender in question.
Long-term relief
When you are struggling to manage loan payments, you could request that the loan be placed in forbearance or your lender could decide to foreclose on the loan. Neither of these options is ideal as forbearance is only a temporary solution that simply “kicks the can down the road” while foreclosure will have a severe impact on your credit and could cost you other unprotected assets to satisfy whatever portion of the loan is possible.
A loan modification is a permanent solution to make a loan more manageable for you. Instead of trying to put a bandaid on the situation, you work with the lender to see if there are terms that can be altered to allow you to fulfill the duties of the loan without major credit impacts. Loan modification likely will have a negative impact on your credit score but not nearly as bad as some other options.
Loan modification options
A loan modification is essentially going back to the drawing board on the remaining balance of your loan. Once you prove financial hardship to the lender, you should be able to negotiate most of the terms including:
- Reducing the interest rate
- Extending the term of the loan to lower monthly payments
- Delaying principal payments to satisfy unpaid interest
- Changing from an adjustable-rate mortgage to a fixed-rate mortgage
Reducing the interest rate could lower your monthly payments but, most importantly, will reduce your long-term financial responsibility for the loan. Extending the term of the loan will lower the monthly payments, though you will have payments for longer which could result in higher interest paid in total. Delaying principal payments allows you to focus on any unpaid interests which can make the overall debt more manageable. Changing to a fixed-rate mortgage can be beneficial if you’re on a fixed income and need more predictable payments on your budget.
Whatever your situation dictates, the Law Offices of Ray Garcia can help you through the loan modification process. This could be an important step to getting your finances on the right track without exposing yourself to significant risks such as bankruptcy or foreclosure. Contact us today and get ahead of these issues to get your life back on track.
Law Office of Ray Garcia, P.A.
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