Most of the time, paying off a loan is easy. All you have to do is make the monthly payments on time, and if you have a stable job and have made sure the monthly payment can fit into your budget, you’ll be fine.

However, life can sometimes throw curve balls at us. You might have to pay medical bills that can total tens of thousands of dollars, you might be in an accident where you can’t work for months, or you might lose your job entirely. If any of these things happen, you may not be able to make your loan payments each month, and if you can’t make your payments you’ll default on your loan.

However, you don’t have to sit back and meekly accept that a financial institution is going to take away your home or your car. You do have options, and one option that might allow you to avoid defaulting on your loan is a loan modification.

What is a Loan Modification?

When you modify your loan, you work with your lender to modify some of the terms of your loan. There are several ways the terms of your loan can be modified, but all of them should lead to the same outcome—lowering your monthly payment to the point you can afford it.

You should know that loan modification is not the same thing as loan refinancing. While both loan refinancing and loan modification can lower your monthly payments, when you refinance a loan you’re paying off your original loan with money you got from a new loan with more favorable terms. When you modify a loan, you’ll still have the same loan, just with different terms.

How do you qualify for a loan modification?

While lowering your monthly bill through a loan modification sounds great, not everyone who wants a loan modification will get one. If you want to get a loan modification, you’ll have to either be delinquent on your loan or know that defaulting on your loan is imminent.

In addition, you’ll also have to give your lender a good reason why you’re delinquent on your loan. These reasons can include losing your job, going on disability, having a serious illness or suffering the loss of a spouse.

Typically, you’ll begin the process to modify your loan by talking with a lending advisor and letting them know that you’re having difficulty making your loan payments. You can then give your lender an amount that you can pay and work with them to see if your proposed monthly payment is feasible.

Of course, lenders will want proof of your statements. Expect to fill out a loss mitigation application and provide information about your income and expenses, as well as a hardship letter that explains your circumstances and an IRS Form 4506-T that will allow the lender to view your tax information. You’ll want to check with your lender to see what other information they will require.

You should be aware that getting a loan modification may negatively affect your credit score. However, it will not affect it nearly as much as having your home foreclosed on, your car repossessed and your account being over 90 days overdue.

How Can Lenders Modify Your Loans?

Lenders can modify a loan in several ways:

• They can change your adjustable-rate mortgage to a fixed rate loan, which will fix the amount of interest you’ll have to pay
• They can lower the interest rate, which will lower your monthly payments, although this is usually temporary.
• They can extend the term of your loan, giving you more years to repay your debt. While this will lower your monthly payment, it will also mean you’ll have to pay more in interest fees over the life of the loan.
• Your lender might also reduce the principal of your loan, simply eliminating some of your debt and recalculating your monthly payments based on the smaller amount. Keep in mind that most lenders will not want to use this option, so it is the hardest option to qualify for and typically the last one a lender will consider.
• Finally, a lender can simply postpone your payments until you can get back on your feet. This option is commonly called a forbearance agreement, and while it provides some temporary relief, you will have to make up those payments at some point.

You should also know that these loan modifications may not be permanent. Lenders might only modify your loan until you can start making the original payment, especially if your financial hardship is only temporary.

Get Through Tough Times With First Alliance Credit Union

If you’ve experienced a life event that has left you in financial hardship, loan modifications are a good way to keep you head above water. They can make your monthly payments more affordable, and most lenders would rather work with you to modify your loans rather than go through the hassle of foreclosing on your house or repossessing your property.

If you need help getting through uncertain financial times, contact First Alliance Credit Union today. Our lending advisors will be happy to help you modify your loans, refinance your loans or even help you take out a personal loan to give you some financial security until you can back on your feet.