Communicate with Lenders
Communication is key. You probably know this to be true in your personal relationships, and communication comes in very handy in the professional world as well. For some reason, consumers still haven't caught on that communication with lenders can be really helpful.
Red Sky in Morning
“Red sky at night, sailor's delight. Red sky in morning, sailor's warning.” This ancient wisdom helped sailors know about bad weather ahead of time so that they could prepare for the worst. Like them, you should keep your eyes on the horizon to see what's coming at you. If things are going to get tough, then get ready.
You know better than any of your creditors how your financial health is. You know when you lose your job, suffer a family tragedy, incur major medical expenses, and so on. Use that knowledge to communicate with your lenders. If something happens that's going to make it hard to pay bills, be proactive and tell them up front. You might be surprised how easy it will be.
There are several ways to communicate with your lenders. One way is to make a late payment, or no payment at all. This tells them something, but the message isn't very clear. Another way to communicate with lenders is to pick up the phone, tell them what's going on, and ask if they can work with you.
Thinking Like a Lender
When you miss payments, your lender doesn't know what happened. Are you unwilling to pay the debt? Are you out of money and declaring bankruptcy? Are you still alive? They want to know what's going on because they've got money at risk. If it's just a temporary thing because of some financial hardships, they'll be relieved to hear that.
Remember, lenders don't want you to default on your loans. Although it may not always seem like it, lenders will work with you to make sure you can successfully pay off your debts. Consider the alternative: if you file for a Chapter 7 bankruptcy, your debts might be liquidated. In such a case, your lender could lose money forever. If they have to constantly contact you or take more aggressive steps to collect the money, it costs them money. From a lender's perspective, it might be more efficient to just work with you and wait until you're able to pay your bills.
Getting a Workout
There are a variety of ways that you can work out a deal. The most important thing to know is that you actually can work out a deal. Furthermore, it's best to take action early. By doing so, you can help keep the situation from getting worse than it needs to be, and you'll have more negotiating clout with your lenders. Consider how lenders will view these two situations:
A borrower with a history of paying on time calls and says, “I just lost my job yesterday, and will be short on cash for the next several months. It will be hard to pay you. Is there anything we can do?”
A borrower has not made his payments for the last three months. He has received notices to remind him and requests to call the lender. He finally calls and says, “Sorry I've been late paying. Cash flow has been tough since I lost my job. Is there anything we can do?”
Who do you think is going to have it easier? In addition, the proactive person will probably pay less in late fees, and the situation might not appear on her credit report.
Possible Workout Options
When you ask for help, your lenders might work with you in a variety of ways. In general, you can ask them to waive any fees that they've charged you or would charge you in the future. Additional fees will only increase your debt load and make it harder to pay them off.
Lenders might allow a temporary forbearance, which means you can stop making payments, or make smaller payments, for a specified term. When you know your problems are temporary, forbearance makes sense. At the end of your forbearance, you might have the opportunity to pay back what you missed in one lump sum. Or, you can add the missed payments on top of the existing loan balance, and get those paid off at the back end of your loan.
Another way to get up to date with your lender is to start a repayment plan. You might add a small amount to your normal periodic payments so that you pay off any past-due balance over time. As long as you're making payments on time and settling the debt, your lenders will be happy.
Working out programs and open communication reduce the likelihood of home loss by 80 percent. Freddie Mac conducted a 2004 study to determine the value of foreclosure alternatives like repayment plans and loan modifications and determined that it was a win-win situation. Consumers avoid the stress and costs of foreclosure, and lenders avoid the hassle and loss of revenue.
Finally, you can consider changing the structure of your loan. Sometimes, agreeing to different terms can lower your monthly payments and make it easier to take care of the debt. One way to do this is to extend the term of the loan. Keep in mind that this doesn't help you out when you look at the big picture, it's more of a short-term solution. If you extend the number of years you're paying, you'll also increase the total amount of interest you pay over the term of the loan.