What is loan modification?

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Loan modification refers to a process wherein the terms of an existing loan are changed or modified because of the borrower’s inability to payoff his/her loan under existing terms and condition. In many cases, some borrowers are not able to pay their debts at specified amounts and periods of time. When this happens, the money lender or banks for example are somewhat forced to modify the existing loan terms to make the client pay up for their loan.

The loan modification or adjustments may be in the form of adjusted principal or loan amount. In this particular case, the delinquent loan may already have accumulated several penalties and the lender or bank may be forced to re-compute the actual principal or main loan amount in order to provide better terms to the borrower. Loan modification may also be in the form of lower interest rates or lower monthly premiums. Through these lowered payables, borrowers are expected to pay up their loans more regularly or at specified periods of time and eventually pay off their debts in full. There are also cases wherein the loan adjustments are offered in terms of extended loan term or paying periods. In these cases, the premiums or payables are lowered because they are being stretched out to more months in order to unburden some borrowers with their regular payments.

All modifications to the existing loan terms or agreement are to be agreed upon by both the lender or bank and the borrower. With the new terms, the borrower basically pledges to stick to the new terms and pay up his/her debt with the adjustments made on the loan terms. These terms are basically computed with the borrower’s capacity to pay being taken into serious consideration. some loan modifications even put a cap on the monthly loan payments or premiums based on the actual percentage of the borrower’s household income.

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