The Loan Modification Balancing Act

Banker Resource
April 2, 2013 — 1,197 views  
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A bank is a financial organization that holds deposits in the form of savings accounts and uses these deposits to channel out loans for customers in need of money. In the mean time, it makes profit from the interest on the loan. Quite clearly, it is not advisable for the bank to make it difficult for the customer to pay back the loan. Therefore banks offer modification to their client’s loan agreement to make paybacks more convenient.

Why Banks Choose Loan Modification

In the event when a customer fails to pay back in time, there are only a few options left with the bank to retrieve its money. Some of them being:

  • Repossession of property.
  • Watch the customer declare bankruptcy and gain little or nothing out of it.
  • Attempt to seize the account and hence retrieve some of the amount.

However, none of these attempts are profitable for the bank or in any way exciting for the customer. Therefore, credit providers accept few modifications in the loan agreement even before accepting to lend, in order to avoid such situations in the future. Modifications ease the repayment process for the customer and is often more profitable for the bank.

Who is Eligible for a Loan Modification?

Having mentioned the advantages of loan modification, it is also necessary to mention the risks associated with it, especially when it comes to who gets the benefit of these modifications. It is in the loan provider’s benefit to carefully review the credit report of a particular customer in view. Essentially a credit report is collective information about the customers borrowing history, marked and reported on a scale of 300-900 points. People with high scores suggesting good payback reputations are more likely to be eligible for modifications in their loan structure. A bank professional has to request the information from a credit bureau, which is an information database of credit activities.

What are the Different Loan Modification Options?

As mentioned earlier, a bank is essentially a profit making institution. So to ensure profitable business, loan providers in banks need to consider certain loan modification alternatives. A certain balance has to be maintained while providing leverage to a customer on their repayment options so that the bank’s interest are not in the line. Mentioned below are certain loan modifications alternatives, one or more of which can be chosen considering respective situations in hand.

  • First, leverage that can be given is extension of the loan term in view of a genuine problem on the beholders side.
  • Interest rates charged can be reduced, for example, in education loans, seeing the potential of a particular candidate.
  • Forgiving the principle amount of the loan. Although rarely given but under special circumstances a certain amount from the main principle can be deducted.
  • Allow to skip installments, and add the remaining amount to the end of the loan term.
  • The most useful modification is refinancing the loan option. It means that the debt obligation of the customer is restructured under entirely new terms and conditions discarding the original terms. This allows greater freedom for the customer as well as gives the bank a second chance to structure the agreement in the most profitable sense.

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