What Is The Impact of Loan Modification On My Credit Score?

Loan modification comes in a variety of forms all aimed at allowing you to pay off your debt in an alternative way to the terms you initially agreed on. Modification may mean any of the standard practices including debt negotiations, refinancing or early pay-off. Modification will be beneficial to some consumers, but you should consider its impact on your credit.

Refinancing & Negotiation

Refinancing may pay off if you believe you can get a better interest rate on a new loan. If your initial loan was a sub-prime agreement, it may adjust to a high rate, and securing a fixed-rate loan can be beneficial. Negotiation allows you to pay down a portion of your existing debt in a lump sum in return for forgiveness of the remaining debt.

Affect on Your Credit

Your credit score will be affected when you modify a loan because lenders prefer if loans are paid off on their original terms. Your interest rate, length of loan and monthly payments were determined according to the factors you agreed on. When you change those factors, you are essentially violating your contract with the lender. However, the affect on your credit score is not as big as if you miss several payments or default all together. Consider fees and penalties along with the total impact to your credit before entering modification talks.