What is a Car Loan Modification?
The housing market crash is a few years behind us now, but still painfully fresh in the memories of many. Unfortunately, a lot of people lost their homes to foreclosure. Fortunately, others were able to remain in their homes due to a program called loan modification. If you were lucky enough to avoid the threat of foreclosure, you may not know about loan modifications, which is what this article is about.
Except we're going to discuss loan modifications of auto loans. That's because millions of Americans are still struggling to make ends meet and many of them have outstanding car loans. If you are one of them, understanding what a loan modification is might be a very good thing. So, with that in mind, here is a brief look at car loan modifications.
Car Loan Modification Defined
An auto loan modification is where the terms of an existing loan are altered by agreement of both the lender and borrower. The basis for the modification is the borrower's inability to continue to perform his side of the loan contract, that is, he or she cannot keep up with the payments or other terms as set out in the loan agreement. A loan modification is not the only method of dealing with an inability to pay and it is important to understand the other possible options.
Loan Modification v. Deferment
A deferment is an agreement between the borrower and lender that allows for a short-term period in which the borrower does not have to make his or her regular monthly payments.
The reasons for a payment deferment are similar to those for a loan modification except that they are seen as temporary and, once remedied, the borrower will resume payments under the current loan agreement. The key here is that the deferment is temporary and does not result in a modification to the original agreement terms, except that the time period will be extended to accommodate the missed payments.
In some cases, the terms of a deferment are part of the original loan contract. Whether they are or not, your lender may agree to a deferment as long as you have proof of the hardship causing the need for the it. A deferment is preferable to a modification because it will not affect your overall credit score.
Why would a lender agree to modify a loan?
It's all about the dollars and cents with your lender. If modifying your loan is the most beneficial option for them financially, they'll do it. In practical terms, that means that going through the foreclosure and repossession process will cost them more than the money they will lose with a modification.
Watch out for loan modification scams.
Speaking of the mortgage crisis, remember how a number of con artists popped up to prey on homeowners in trouble by promising to arrange a loan modification with mortgagers? They're at it again, but this time they're going after people in trouble with their auto loans. They promise to work with your lender to get you a great modification deal. For a fee, of course. And that's the giveaway, the upfront fee. Don't fall for this scam. If you are in need of a loan modification, contact your lender directly.
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