4 Things Loan Modification Companies Don't Tell You

Loan modification companies help you renegotiate your existing loans. Most of the time, they will offer a completely new loan that allows you to pay off your current debt. By doing so, they can provide more favorable loan options. While this may sound like a good idea, you should be aware of some advice they are likely to leave out.

#1 Your Credit Score Will Drop

When you pay off a loan before it matures, the lender actually loses money on interest payments over time. As such, the lender will report you for breaking your loan contract. Even though it may seem like you are doing a good thing by prepaying your loan, lenders actually do not want this to occur. You will see your credit score drop. If you have adjustable loans open, the interest rates on these may rise. In the future, other lenders will see you broke an installment loan contract and will build in less favorable terms to your loan as a result. 

#2 You Face Financial Penalties

In addition to penalizing your credit score when you modify a loan, your lender will likely exact financial penalties. These are typically listed in your initial loan contract. At any point, you may also ask for a payoff quote with the lender. You will find this quote is typically higher than the total cost of paying the loan according to schedule. Because of these penalties, you will actually have to take your new loan for a sum greater than the amount remaining on your current loan. This may be worth the change if you can better afford the monthly payments on the new loan. However, you should weigh the cost of the modification in full and only make the move if it is financially viable.

#3 You Owe More Over Time

Because your new loan will have to cover the cost of the modification, you may actually owe more over time. It is also possible that the lower monthly payments you arrange with the new lender means a higher interest rate, further driving up the total cost. Modification lenders will appeal to you with enticing interest rates or low monthly payments, but you should pay attention to the total cost over time on the new loan versus the existing loan. if the modification loan is higher, only make the change if you face default on your current loan without the modification.

#4 You Should Declare Bankruptcy

If you do face default, you should be aware of the option to declare bankruptcy. Bankruptcy is a scary idea for most borrowers, but it is also a legal protection that can be necessary at times. Those borrowers who unequivocally qualify for bankruptcy protection typically lack the financial resources to pay off their loan even at the modified schedule. As such, the modification will only delay the bankruptcy instead of prevent it all together. It would be better to simply file for bankruptcy now than to pay off a portion of the costly modification loan prior to filing.