Just about everyone gets behind on paying bills from time to time. Late or skipped payments on credit cards, mortgages, auto loans, and other debts can really put people in a bind.
Personally, my most stressful experience of falling behind was during a brief period of unemployment. I just couldn’t keep up with my student loan payments. In fact, I barely had enough to keep the lights on!
Fortunately, most creditors are willing to work with people who genuinely want to get back up to date on their payments. So when you’re ready to get back on track, all you have to do is ask for a repayment plan. But what exactly is a repayment plan?
A repayment plan is a special agreement between a lender and a borrower, to help struggling borrowers repay a debt in smaller, more manageable payments.
Understanding how repayment plans work can really help you feel more in control of improving your credit. Whether you’re behind on your mortgage or struggling with student loans, I’ll tell you what you need to know about getting out of the red.
Repayment Plan Basics
Lenders would much rather give borrowers a little grace and keep accounts current than have to write off debts as defaulted. Repayment plans help you as a borrower to get some breathing room, improve your credit, and fix your financial outlook while the lender gets their money back. Everybody wins!
Purpose of Repayment Plans
The purpose of a repayment plan is to bring a delinquent account current. If you’ve been struggling to pay your credit card, mortgage, or loan, negotiating a repayment plan based on your situation will help you first and foremost by avoiding default.
Changing your payment terms so that you have a lower monthly payment can also help you plan your finances better. Falling behind on one bill turns into falling behind on all of your bills very quickly because of how overdue balances balloon your future bills. Slowing down or stopping that process makes it easier to tackle the rest of your finances.
For many people, the first step in improving credit is just to get all their accounts out of delinquent status. If your biggest obstacle to getting back into current status is the size of your monthly payments or your overdue balance, then a repayment plan will make a huge difference.
While it may mean paying for a longer period, it’s worth exploring the option to start the process of boosting your credit score.
Key Elements
Each repayment plan is a little bit different, based on the type of debt, the policies of the lender, and the borrower’s situation. However, there are a few key features that are consistent from one repayment plan to another.
One of the first features of a repayment plan is a change in the payment amount. Changing your monthly payment to a lower amount can make it easier for you to pay it consistently, so it’s a common option for repayment agreements. For credit card debt, this can be a lower minimum payment, and for other debts, this can be a lower monthly installment.
Another common element for repayment plans is a change in the overall schedule of payment. For example, your payment schedule could shift from monthly to biweekly. The options to change your payment schedule depend a lot on what kind of debt you’re paying off. In the case of payday loans and other cash advances, you might be able to negotiate a schedule of several payments instead of just one.
Your lender might also recommend a change in the duration of payment, also known as the payment term. If you’re struggling to pay off a 5-year mortgage because of a large monthly payment, the bank could consider letting you pay the balance over a longer period, which lowers the monthly amount.
Typically, these changes also come with a change in the interest rate. Usually, this means lowering your interest rate to slow down the growth of your debt. Since you’re paying for a longer term, the lender still makes money from the interest.
Any or all of these features could come into play for your repayment plan, and it’s a good idea to make sure you understand the terms and conditions before you agree. There is also often some room to negotiate and advocate for yourself, so make sure you ask a lot of questions about what options are available.
Repayment Plan Structures
No two repayment plans are exactly alike because each plan is made to try and fit the needs of an individual borrower. However, most repayment plans fall into one of a few types, based on the specific policies of the lender and the common borrower situations that arise.
Fixed repayment plans are fairly straightforward agreements, offering a specific monthly amount that never changes for the course of the payment term. You’ll pay the same amount each payment period (monthly, weekly, biweekly, etc.) until the balance is paid off.
Fixed repayment plans help people who have a set monthly income to budget around their bills more easily by meeting a consistent payment amount.
Graduated payment plans are a good option for people whose incomes are on an upswing, making it easier to save money early on and pay the balance off faster as more money comes in.
Graduated payment plans offer a payment amount that starts small and increases over time at a steady, specific rate. The goal with these payments is to provide a little breathing room: the early payments are much smaller, giving you the chance to catch up and hopefully improve your financial situation before increasing the amount due.
Income-driven repayment plans change your payments to a more manageable amount based on your income and existing expenses. This usually involves a discussion about how much you make — and may require documentation like tax returns or pay stubs — and what you’re able to pay based on all your other obligations.
Income-driven payment plans are strongest for people whose incomes have recently decreased, allowing more flexibility and adaptability to what you’re earning now.
Types of Financing with Repayment Plans
Almost all lenders offer some type of repayment plan for borrowers struggling to make their scheduled payments on a given debt. However, certain types of debt and certain types of lenders are more likely to have specific repayment plan guidelines in place.
Student Loan Repayment Plans
There are a few standard repayment plan options for student loans. Although the specific details can vary, your student loan servicer will likely offer one of three basic options:
- Standard repayment plans offer the same monthly amount over a set period of time, generally 10 years. This method of repayment accrues the least amount of interest, but the monthly payments can be a struggle if your income decreases. Another benefit to this repayment plan is that you generally pay off your balance faster since more of each payment chips away at the principal balance.
- Graduated repayment plans start with lower monthly payments that increase over the life of the payment term. If you know that you’re likely to steadily increase your monthly income over time, this can help you manage your budget and finances while still paying off your balance in a reasonable time frame. Keep in mind, however, that you’ll be paying for longer than with a standard repayment plan and also paying more in interest.
- Income-based repayment plans use your monthly or annual income (and some consideration for your other expenses) as the basis for your monthly payments. As your income increases, your payments increase. This option is helpful if you’re going through a rough patch career-wise, keeping your account current while not leaving you broke. Keep in mind, however, that you’re likely to be paying for longer, and you’ll also accrue more interest.
Mortgage and Auto Loan Repayment Plans
For long-term, high-balance loan repayments like mortgages and auto loans, the options that creditors offer are a little different.
If you’re struggling to make your mortgage payments, the options available to you depend on whether you have a fixed-rate or adjustable-rate mortgage. With an adjustable-rate mortgage, you can ask to refinance your loan and change to a fixed-rate mortgage, which usually results in a lower rate and, therefore, lower monthly payments.
For both fixed-rate and adjustable-rate mortgages, a loan forbearance is a way to get back into good standing. Typically used in student loans and mortgages, a forbearance agreement allows for a period of time where payments are suspended, giving you some breathing room and time to adjust your finances.
When regular payments resume, you’ll either pay a lump sum in addition to your regular payments or make partial payments in addition to your monthly payment.
Both mortgages and auto loans also often offer loan modification options, such as lowering the interest rate, rolling missed payments into the overall balance, and/or extending the payment term. These adjustments usually come combined with actions on the borrower’s side, like a good faith payment up front.
Although the overall amount that you pay may increase, these modifications can lower your monthly payments, making it easier to make them consistently.
Credit Card Repayment Plans
Some credit card issuers offer repayment plans for borrowers who want to get their balances under control, but most credit card repayment plans come as part of a debt relief or debt settlement plan. This makes the options a little different in comparison to other repayment plans.
One common tactic is to consolidate existing debts (not just credit card balances but also mortgages and some types of loans and balances due) under one umbrella, with a fixed interest rate. If you have several types of debt that you’re trying to pay off at the same time, all at different interest rates, this can give you a big advantage by lowering your overall interest and standardizing it.
Debt relief companies can also negotiate on your behalf with various creditors, either convincing them to reduce the overall balance that you owe or change the terms of your repayment (such as interest rates or payment terms). This does come at a cost, however, so keep an eye out for the fee.
Hardship programs are another option. Hardship programs vary from one credit card issuer to another, but the features can include waiving late fees, extending due dates, suspending the interest rate for a set time, or lowering minimum payments for a specific period. These programs exist to help if you’re experiencing a short-term issue, giving you a little bit of space to sort things out before your bills go back to normal.
Benefits and Potential Drawbacks of Repayment Plans
Before you decide to look into a repayment plan to get your financial life back on track, it’s important to consider not just the benefits but also the potential risks of agreeing to a plan.
Benefits
One of the key benefits to negotiating and agreeing to a repayment plan is that it makes your finances more predictable. Instead of mounting past-due balances and climbing interest fees, a repayment plan means you’ll have a more consistent, moderate monthly bill. This makes it easier to plan your budget and make the most out of your income.
Repayment plans also provide the possibility of saving money on interest charges. Many repayment offers include a reduction in the interest rate, which means that if you’re able to pay a bit more when your financial situation improves, you’ll chip away at the principal balance more quickly. A lower principal balance plus a lower interest rate means less of your money overall going to interest.
The most obvious benefit to agreeing to a repayment plan is that it’s a solid way to improve your credit. By taking your accounts out of delinquency and bringing them current, a repayment plan will likely begin to improve your credit score very quickly.
Being able to make payments consistently and reduce your debt steadily will also improve your report and score, leaving you in a much better position.
Potential Drawbacks
One of the obvious flaws of accepting a repayment plan is that you’re almost certainly going to be paying your credit off for a longer period of time. After all, you can’t expect to pay less every month and still pay the debt off in the original payment term. This is especially apparent with student loan repayment plans and mortgages, where borrowers who originally set out to pay for 10 years may find themselves continuing to pay for decades.
Another possible drawback is that you risk paying more interest overall. This is because, even if your interest rate is lower, the period of time that you’re paying off is longer, and the balance your interest is assessed on remains at the same level or a longer period. If you hate having to pay interest and you’re in a position to continue your normal payments, it may be more worthwhile to hold off on accepting a repayment plan.
Finally, repayment plans come with a certain level of risk, both for the lender and the borrower. Most repayment plans are a kind of “probation,” so you’re under the microscope while you’re on them.
In fact, your repayment plan may even come with stipulations like a lower tolerance for missed or late payments. These stipulations can lead to penalties, default, and another hit to your credit report.
If you’re not 100% certain you can consistently meet the terms of a proposed repayment agreement, you may need to keep negotiating further. Make sure you read your contract thoroughly and ask a lot of questions to ensure that you understand what you’re signing up for.
A Repayment Plan Gives You a Framework to Pay Off Your Debt
While all of us fall behind on payments from time to time, most creditors are willing to work with you to help you get back on track. A repayment plan can be an excellent tool to help you lower your monthly payments, make your financial situation more manageable, and reduce your debt over time.
All of these factors can help you improve your credit rating and score, which in turn makes you a lot more prepared to handle whatever emergencies and life events come up.
If you’re ready to get your finances back in order and you’re able and willing to accept the potential drawbacks, consider reaching out to your lenders and asking for a repayment plan to bring your accounts in line.