How Can I Lower My Loan Payments?
If your bank has approved a loan for you, this is no reason to relax. No matter how favorable the conditions are, they can be improved, for example, by reducing the size of the monthly payment. To do this, you need to follow the changes in the market that may be happening right now. What you should pay attention to and what will help to make the loan conditions more profitable? We will tell you in the article.
What can happen if I don’t pay my loan?
If you have a difficult life situation, you have several options not to pay off the loan debt or to get a temporary respite:
- agree with the bank about a credit vacation;
- hope for payment from the insurance company;
- file a bankruptcy petition;
- declare the contract invalid through the court.
Of course, you can go the other way: just stop answering the lender’s calls. But this is not recommended. The amount of debt will grow like a snowball due to fines and penalties, collectors will be involved in the process, and the credit history will be affected so much that no bank will subsequently approve your loan application.
If the borrower has additionally concluded an insurance contract, an insurance company can cover the debt to the bank.
Insured events in different situations are:
- job loss;
- temporary disability due to illness or injury;
Pay attention to the terms of the policy. Not all ICs are ready to pay off 100% of the debt. For example, in the event of temporary disability, an insurance company may compensate the bank for an amount equal to three monthly payments. In other words, the borrower is given time to get back on his/her feet and continue to pay the loan.
If the financial condition of the borrower is close to collapse, the bankruptcy procedure may be the way out. The law establishes a number of conditions for its launch. To start a bankruptcy process, you need to file a claim with an arbitration court. Debts to creditors will be distributed through the sale of the borrower’s property. If there is nothing to take from the borrower, he or she will be released from all debts.
The option to write off the debt may be the recognition of the loan agreement as invalid. This is possible if an onerous deal was made. Let’s say right away that it is extremely difficult to prove this. It is better to immediately contact an experienced lawyer.
Most often, onerous terms are offered by microfinance organizations. In order for the court to recognize the contract as enslaving, at least one of the following conditions must be met:
- the creditor used violence or threats;
- one of the parties was deceived or did not communicate important terms of the transaction;
- the borrower was forced to accept unfavorable conditions due to a difficult life situation.
In these cases, you need to file a claim in court and seek to invalidate the contract.
How to legally reduce a loan payment?
Deferment of payment
In emergency situations, when the borrower is sure that the situation will soon normalize and he or she will be able to make monthly payments. This option is not suitable for those who do not anticipate financial income in the near future.
How it works
Deferment of payment is also called a credit vacation. The bank allows the borrower to pay one interest for some time or, conversely, to repay only the principal debt. In some cases, clients are completely exempted from the obligation to make a monthly payment for a period from 1 month to a year. Most often this method is used for long-term loans – car loans and mortgages.
How to do it
- Submit an application to the bank where you indicate the reason for payment deferment;
- Take with you your ID, a copy of the loan agreement, documents confirming the deterioration of the financial situation;
- Wait for an answer and carefully study the proposed conditions.
This compound word means a new loan that can only be spent to pay off existing debt.
In order to choose the best moment for refinancing, it is necessary to monitor economic changes in the country, in particular, the key rate. It affects the cost of the loan, that is, the amount of interest you pay for using the bank’s money. When the key rate goes down, so does the cost of loans.
How it works
Nowadays, refinancing is beneficial. After paying off the existing debt, the new loan will need to be repaid at a lower interest rate, and the monthly loan payment will decrease.
The key rate has been gradually decreasing for several years. This means that loans received a year ago can now be refinanced on more favorable terms.
Another advantage of refinancing is that some banks may offer a new loan without collateral. The property that is pledged will be released, and you will be able to dispose of it at your discretion, for example, sell it.
How to do it
To apply for refinancing, you will need the same procedure as when obtaining a loan. You need to be ready to re-check, provide documents about your company and sign a loan agreement. Depending on the bank, the receipt of money can take from a couple of days to several months.
Before applying for refinancing, it is necessary to clarify how many days an application for repayment of an existing loan is considered. If you do not meet this deadline, the debt will not be able to be closed in the next payment, and you will need to wait for the next month. During this time, you will have to pay double interest: both for the new and for the old loan.
In this case, the loan terms remain the same, and the amount of the monthly payment decreases due to the fact that you pay part of the principal debt ahead of schedule.
This method is worth considering when you have a business loan and your company has additional income. For example, if the demand for your product depends on the season, like the sellers of New Year’s accessories or winter attributes for cars. If the increased profits from the “hot” period are spent on early loan repayment, the payment will decrease during the rest of the year, when incomes decline.
How it works
The interest on the loan is charged on the balance of the principal debt. The smaller it is, the lower the percentage itself.
For early loan repayment, you must choose the right time.
- If you repay the loan in the same amount every month (annuity payments) – this should be done in the first half of the term;
- If the principal amount is split into equal parts, and the monthly payment is gradually reduced (differentiated payments) – at any time.
How to do it
The procedure for early repayment of a part of the loan is written in the bank agreement. Usually, it is necessary to fill out an application for a certain time before the date of the next debiting of funds and put a sufficient amount into the account on time. If you have a personal account in the Internet bank or a mobile application, you can do this online without visiting the bank.
Changing the contract terms
This process is technically the easiest but also the least likely. At the request of the borrower, the bank changes the terms of the loan and lowers the interest rate.
This method can work at the same time as refinancing – when the key rate is reduced. At this point, banks (including yours) will begin to reduce interest on loans.
How it works
To keep the client, the bank can meet you halfway and change the terms of the agreement. But this is its right, not its duty.
Some borrowers are trying to prove that the key rate cut is a significant change in circumstances that gives them the right to legally require new terms of the loan agreement. If the case comes to court, the dispute is settled in favor of the bank.
How to do it
It is necessary to send a written request to the bank. The outcome will depend on the internal policy of the credit institution and on your arguments. For example, you can list specific offers from other banks. In case of refusal to reduce the interest rate, there is always an opportunity to refinance the loan.
When the bank meets you halfway
The bank is highly likely to agree to a restructuring or deferment if the borrower:
- previously did not allow delays;
- has been a client of the bank for a long time;
- receives wages on a bank card;
- provided valid reasons.
We recommend contacting a credit institution as soon as you understand that financial difficulties are approaching.
If you submit an application before the first delay occurs and convince the bank that payments under the current loan conditions will not be possible in the near future, the institution will meet you halfway.
In practice, banks accept the following reasons as valid:
- dismissal due to mass reduction or liquidation of the enterprise;
- replenishment in the family;
- serious illness.
Each of them will have to be confirmed by documents.
Why you shouldn’t be afraid of a court
The court will take the side of the borrower if the latter proves that he or she did not pay the loan due to a difficult life situation. An attempt to settle the situation with the bank will also play in favor of the debtor. The court can reduce the amount of the debt by writing off penalties or fines if their amount turns out to be disproportionate to the amount of the loan. In addition, the judge has the right to approve a new payment schedule that suits both the borrower and the bank. Also, the client may ask for a temporary grace period.