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What Should I Do If I Cannot Make My Loan Payments?

by on August 18, 2012

in FAQs

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Many people take out personal loans with full expectations that they will repay the money. However, poor financial planning and unexpected circumstances can make this difficult or impossible. If you find yourself with a personal loan that you are unable to repay, there are several ways to handle the situation without sinking further into debt or having to file for bankruptcy. By taking action immediately, you can prevent further damage to your credit.

If your loan has a high interest rate, it may be possible to reduce it by refinancing the loan. Compare personal loans online and at banks and building societies. Determine whether the lower rate will make the loan affordable and if so, refinance using the loan with the most favorable rates and terms available. If your financial situation could make early repayment a possibility, ask the lender about whether the loan has an early repayment penalty.

Some people find finances more affordable to manage when they consolidate their debts. They take out a new loan and use this money to repay their existing debts, leaving them with one loan payment. The new loan typically features a lower rate of interest and longer repayment term than their existing debts, making it affordable. By making loan payments as agreed, borrowers also help to improve their credit rating. Shopping around for this debt consolidation loan is a smart idea because interest rates and repayment terms vary greatly.

Making an informal arrangement with a creditor can relieve some of the financial pressure of an unaffordable loan. The debtor contacts the creditor to arrange reduced regular repayments on the loan. Though a creditor has no obligation to participate in an informal arrangement, it typically will if repayment cannot be made using another method. A debt management expert can provide a debtor with advice and guidance regarding this approach.

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A debt management plan is another way to handle an unaffordable personal loan. This plan is similar to an informal arrangement but a third party, typically a debt management company, negotiates repayments on behalf of the debtor. As with an informal arrangement, the repayment amount is based on how much the debtor can afford to repay and the debt is repaid in full. Some creditors will agree to freeze interest charges for the loan so the amount due will not increase while the debt management plan is in effect.

Some debt management companies charge a fee for setting up and managing this plan. There are also free resources like National Debtline and Citizens Advice. Consumer Credit Counseling Service also provides free, confidential advice and guidance regarding all types of debt management as well as personal budgeting.

Formal agreements including an Individual Voluntary Arrangement, Administration Order, and Debt Relief Order are also available. Each is designed for consumers with a different level of debt so consultation with a debt professional is recommended. The Direct Gov website is a good place to start learning about debt repayment because it features information, contact details, and other resources.

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