Many people are faced with being fired from their jobs. This can happen for a variety of reasons, but staff cuts are one of the most common. Of course, the coronavirus pandemic has also exacerbated the situation and left many Americans unemployed and unable to cope with their ordinary needs. Since unemployment often causes delays in loan payments, people want to know how to fix the situation and if there is any solution. If you are one of those people, look out for a loan modification.

Loan modification can help you cope with a difficult life situation, partially reduce your payments and stop collection activity. You should be aware that loan modification is mainly suitable for secured loans, however, personal loans or student loans can also be included.

However, a loan modification is not always a safe solution, as it has its drawbacks. For example, modifying a loan can increase the value of your loan, so you need to carefully consider the pros and cons before doing anything. By looking through the basic information about loan modification, you can make the right decision.

Loan modification definition

As a rule, the loan modification does not need to be defined, as the name speaks for itself. A loan modification is a change in the terms of a loan to reduce payments. When it comes to a secured loan, payments are reduced so that a person can afford a home and stay in it, having managed to deal with a difficult life situation.

As already mentioned, although the loan modification is mainly aimed at secured loan types, you can also modify other loans, such as personal or student ones. Thus, if you have a difficult life situation, then a loan modification can help you cope with it. However, loan modifications are limited if you cannot make full payment and your credit is too bad to refinance your loan. So, if you are facing an emergency situation, then a lower pay can help you deal with it.

Does the loan modification affect the credit rating?

Many borrowers who see loan modification as a way out of a difficult financial situation ask whether it will affect their credit. However, it should be understood that those people who want to modify the loan are usually already in a difficult situation, and have already worsened their credit with late payments. However, what about the loan modification itself?

Typically, during the loan modification process, the comment code “payment on modified terms” will appear on your credit report. While this comment is derogatory, you shouldn't think about it. If the loan modification can really help you cope with a difficult situation and you will be able to make payments on time, then it will have a positive impact on your credit. Think about the fact that if you do not modify the loan you will not be able to make regular monthly payments, and this will undoubtedly worsen your credit score even more.

Thus, loan modification is not suitable for people who feel that they will not be able to cope even with reduced payments. However, if the reduced fee helps you get back on your feet then this might be a really good solution for you.

Advantages and Disadvantages of Loan Modification

Before making a decision, it is important to pay attention to all factors. Thus, when studying information about loan modifications, it is important to examine the advantages and disadvantages of this solution. While the advantages will help you see if the offer suits your wants and needs, the disadvantages will indicate points worth thinking twice about.

You should be aware that a loan modification can help you change one or more of the terms of your loan to help you cope with a difficult situation. Modifications could include changing the variable interest rate to a fixed one, extending the term length, and lowering the interest rate. However, it is important to understand that the lender also wants to compensate for the improved conditions he is offering you. Thus, if your rate decreases, then you will pay off the loan longer. However, please note the benefits of this solution.

Benefits of loan modification
  • The ability to stay in your home. Of course, even in the most difficult financial situation, a roof over your head is simply necessary. If you still have to pay off your home loan, then you need to do everything you can to keep it. Thus, a loan modification will help you stay in your own home and keep making payments. Moreover, this option will be the best for both you and the bank, as banks prefer to use other options to avoid foreclosure. As a rule, this process is long and expensive, so the right decision must be reached.
  • Decrease in payments. Of course, when times are tough, your biggest concern is how to pay for food and utility bills, but if you don't have a home, then all other problems will not matter. Thus, reduced payments can help you cope and give you the time you need to find a new job and improve your life situation.
Disadvantages of loan modification
  • Loan cost. While a loan modification gives you the opportunity to lower your monthly payments and ease your situation, the total loan amount you pay off may be higher in the long run. If your monthly payments are reduced, then you will be paying off the loan longer and overpaying a larger amount as interest.
  • Time and effort. Of course, loan modification is not a quick and easy process. In order to modify a loan, you will come to collect documents such as recent payments, bank statements, fill out a table of income and expenses, and so on. You will also need to write a hardship statement (explaining your need for loan modification). Thus, you may face fatigue and stress, which will negatively affect your life situation. Moreover, you also have a trial period before the modification is approved. Typically, you will need about 3 months to prove that you will be able to make new lower payments.
  • Approval. Unfortunately, it's worth saying that your loan modification may not be approved. Your application must really show that you are in a fairly difficult financial situation. Also, as mentioned, you must prove that you can repay the loan if the modification is approved. Thus, the lender must be sure that these are only temporary difficulties, and that in the future you will be a reliable borrower who makes payments on the loan on time.

After examining the pros, you probably understand that modification is a good option to exhale and ease your situation. However, do not make any hasty decisions, as the disadvantages of the loan modification are significant too.

Moreover, before signing any documents, carefully study the terms of the contract so that they are really beneficial for you. Since there are different lenders, some of them only want to have benefited from difficult life situations, not help people cope with them.

So, loan modification is a good decision and should only be considered if you are confident that you will be able to make reduced monthly payments in a timely manner.