What is a loan modification? Well, when a lender makes any changes in the terms of your original loan, it is known as loan modification. It can be an increase in the length of the loan period, a decrease in the interest rate, a change in the type of loan, or all of them.

A loan modification is usually done to make the loan terms easier and affordable for the borrower, upon their request. However, loan modifications are subject to the lender’s approval.

So how does loan modification work? Is it even worth it? Continue reading to find out everything there is to know about loan modification.

What Is a Loan Modification?

A loan modification is exactly what it sounds like, i.e. a permanent change in your loan’s terms to make the loan more borrower-friendly. When you are faced with financial hardship and are unable to pay your monthly payments for an indefinite period of time, you can negotiate a loan modification with your lender.

A loan modification is usually carried out in the case of installment loans, such as personal loans, student loans, or auto loans. It is done upon the request of the borrower and usually involves the presence of a settlement party. 

Who Can Apply for Loan Modification?

Every lender has different criteria for a loan modification. For instance, if you are facing financial hardship, you will need to show proof of any recent unexpected expenses and/or a major loss of income. This can include situations like:

• Divorce.
• Death of your spouse.
• A disability.
• Long-term illness.
• Loss of income due to unemployment or any other reasons beyond your control.
• Loss of assets due to natural disasters.

Additionally, you’ll need to reassure the lender that you’ll be upholding your promise to pay the revised monthly payments on time. To do so, you’ll need to share your financial documents and records just like you did when you were applying for the loan.

For instance, you’ll be asked to share your credit score, credit report, any outstanding debts, and your monthly income.

If you can prove your financial instability and reassure the lender that you’ll be keeping up with your revised monthly payments, you can apply for loan modification. Read on to find out how.

How to Apply for Loan Modification?

To apply for loan modification, you will need to follow these steps:

Step 1: Prepare the Right Documents

The first step involves collecting all the relevant documents that can help you prove financial instability. This can include your bank statements, divorce decree, death certificate, pay stubs from a big purchase, medical bills, or bills for home repairs.

Step 2: Reach Out to Your Lender

Once you have gathered all the relevant documents, reach out to your lender. They will review your case thoroughly and ask you to submit an application form if you are eligible. Make sure to attach all the supporting documents to strengthen your case. 

Step 3: Make Trial Payments (If Applicable)

If your loan modification request is approved, your lender may ask you to make trial payments to check if you’ll be able to make the revised payments in the future. 

They usually ask for up to three trial payments. The payable amount differs from the final modification terms and is set to match the borrower’s affordability. Once you have made these payments, your lender will offer you permanently modified loan terms.

What Happens After a Loan Modification Is Approved?

If your loan has been modified, your lender will provide you with a new loan agreement. Make sure to keep up with the revised payments. You don’t want missed or late payments going up on your credit report.

Frequently Asked Questions (FAQs)

1. What Are Some Alternatives to Loan Modification?

While loan modification is a good way to lower your monthly payments in the case of financial hardship, it’s not the only way. You can also opt for loan forbearance, payment deferment, or a repayment plan. However, before you make any decisions, make sure to consult with an expert to make the right financial move.

2. Do I Need a Lawyer to Get a Loan Modification?

No. You’re not required to consult with a lawyer in order to get a loan modification. However, a lawyer can offer professional advice and also make the entire process more seamless for you.

3. How Is a Loan Modified?

A loan is modified when your loan term is extended, the interest rate is lowered, or the interest rates are switched from variable to fixed. All of this is to make it easier for the borrower to repay the loan.

4. Does Loan Modification Hurt Your Credit?

A loan modification is often reported to the credit bureaus by lenders. It is considered a debt settlement, which can hurt your credit score. However, it is only a minor impact.

If you are looking for an affordable personal loan with easy terms and same-day funding, apply today at Cash in Minutes.