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             22 November, 2019
 

    
Category:  Articles » Finances » Loans

 

Types of Loan Modification

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         Views: 1133
2010-10-16 07:49:31     
Article by Mary Thomson

The main purpose of loan modification is to make things easier for the loan taker to pay his repayments. Sometimes after an individual takes out a loan, due to unforeseen circumstances he would be struggling to make the repayments and in this situation, instead of closing down the loan as a whole, one can always go for loan modification. This process usually consists of modifying or adjusting the conditions of the loan so that one can easily make the repayments.

The common types of loan modification are:

1. Capitalization of Arrears - Arrears means any type of outstanding payments or due payments like late fees or any other charges that arises because of past delinquencies. These loan arrears are added to the total amount of the original loan and then a new figure is obtained, which is obviously higher than the previous amount. The new monthly repayment is then calculated on this new amount. This type of modification is most suitable for anyone who is going through trying financial times but is now back on form. It is not at all suitable for people who are looking to lower their repayments.

2. Interest Rate Reduction - This type of modification is very good for cutting down the payment. For example if you were to cut down your loan interest rate from 6% to 3% for a loan of thirty years, then you could be reducing the total payment by as much as 30%! However, this type of modification is sometimes temporary.

3. Freezing of interest rate- When the repayment date is getting closer and the borrower is unable to make the repayment he can freeze the current interest rate and payment temporarily.

4. Extension of term - This means that the borrower can extend his loan period, for instance, he can modify the loan period from a ten year loan to a thirty year loan for the purpose of reduction in monthly repayments.

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