Loan Modification And Its Various Types
Considering the way economies are unpredictable and keep fluctuating
, a time comes when almost every individual requires seeking a loan. The definition of loan according to dictionary is a monetary deal between lender and borrower, where lender allocates specific amount of money for the borrower and expects full repayment.
In some cases, when the borrower is unable to make the repayment as per the original terms and conditions, loan modification is brought into action which means application of specific terms and conditions outside the initial agreement. These terms and conditions are designed in such way that it benefits the borrower and makes it easy to make the repayment.
There are various types of loan modification that are applicable depending upon the magnitude of difficulty the borrower is facing. These modifications are levied with mutual consent of the lender and the borrower. Given below are some of most common types of Loan modifications:
Loan Modification By Reduction In Interest
When a lender lends money to the borrower, it expects a full repayment of the original amount that was loaned, plus some extra payment which is called interest. The ratio of interest is either fixed at the time of original deal or it is floating, meaning it can vary according to rise and fall of official market. Modification by reduction in interest payment means reduction in amount of money the borrower pays apart from the principal sum borrowed. In lieu thereof, once payments are made, most of it is diverted towards principal amount loaned which decreases the outstanding balance quicker.
Loan Modification By Expansion In Loan Term
This type of modification simply means extension in the time period which is allocated to the borrower by the lender to make the loan payments. According to the reciprocated approval of both parties involved a new date which differs from the original stipulated one might be agreed upon.
Loan Modification By Reduction In Principal
Reduction in principal means to lower the principal loan amount borrowed to match the current value of the loan. This form of modification is totally dependent on the discretion of the lender and might not be applicable during the initial stages of repayment. However, it might be considered by the lender during later stages.
Loan Modification by Reducing Late Fees and Penalties
Late fees and penalties are levied on a borrower when certain mutually agreed upon date for making loan repayment passes and borrower fails to deposit a payment. This kind of situation is ideal for application of modification which reduces the late fees and penalties incurred. The key to successful deployment of this kind of modification is for the borrower to communicate the inability to deposit payment to the lender as soon as possible. Procrastination on the issue usually leaves the borrower with fewer options.
These are just few examples of loan modifications; the borrower needs to access his or her own financial standing to select the right one. If this task becomes fairly ambiguous then its best to seek professional help.
by: Muhammad Suhail
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