While it isn’t the most fun topic, the reality is that financial difficulties can affect anyone. As we all know, life happens and sometimes these hardships come with unexpected events that may make it difficult to meet existing loan payments.
Whether it’s due to a job loss, car accident, medical emergency, inflation, or something else, the inability to pay your debt can be stressful and overwhelming.
However, it’s important to remember that there are steps you can take to mitigate the situation and there are resources available to assist you. Keep reading below as we guide you on what to do if you find yourself unable to make a loan payment, and how to manage your financial difficulties effectively.
1. Don’t Ignore the Problem
We can’t stress this enough: the first and most crucial step when you can’t make a loan payment is to face the issue head-on. While we know this is not going to be your gut reaction, it shouldn’t be a surprise that ignoring the problem will not make it go away.
Missing payments can have serious consequences and start to snowball once they occur. Missing a loan payment can do the following:
- Damage your credit score
- Incur late fees
- Possible legal actions from creditors
- Prolong the loan
It’s essential to act quickly and take steps to address the situation as soon as you know you won’t be able to meet your loan obligation.
2. Assess Your Financial Situation
Before you call your lender, closely examine your current financial situation. Try to identify the root cause of your inability to make the payment and consider the following questions:
- Have you experienced a temporary income loss, or is this a long-term issue?
- Are there any other sources of income you can rely on in the near future?
- Can you reduce any expenses to make room for the loan payment?
Calculate an accurate budget that includes your income, essential expenses, and outstanding debts. Having everything written and laid out will give you a better idea of your options and help you explain your situation when you talk to your lender.
3. Contact Your Lender
Once you’ve assessed your finances and have a clear picture of your current budget, then it is time to contact your lender.
The majority of lenders would rather work with borrowers who proactively address payment difficulties than deal with defaulted loans. If a lender has to be the one to reach out to you after a loan payment is missed, the conversation might not be as pleasant. However, many lenders are reasonable and offer temporary solutions to help borrowers get through financial rough patches.
When you call, explain your situation honestly and be prepared with details about your finances. Ask what options are available to you, such as:
Loan deferment or forbearance
This option allows you to temporarily pause or reduce payments for a specified period. Be aware that interest might continue to accrue, increasing the overall cost of your loan, but is a nice temporary solution as a bridge while you find other income sources. .
Loan modification
Your lender may agree to update your existing loan terms, like extending the repayment period or lowering the interest rate to make your payments more manageable. This is why you need to be proactive in asking for assistance, because there are several options available, but you will not know the answer until you ask.
Repayment plan
Some lenders offer alternative repayment plans to help borrowers catch up on missed payments by spreading them out over time.
Document your conversation and any agreements reached for future reference.
4. Prioritize Your Debts
Whether you are facing financial difficulties or not, it’s important to prioritize your debts.
Certain loans, such as secured loans (e.g., mortgages and auto loans), should be given higher priority because missing payments on these can lead to the loss of your home or vehicle. Unsecured debts (credit cards or personal loans), can typically be negotiated more easily and should be pushed down the totem pole.
Create a list of all your debts in the same budgeting spreadsheet and rank them in order of importance. Once you have everything outlined it will be easier to sort out which debts are most important, how much you can afford to pay and go down the line.
5. Consider Refinancing or Consolidating
If you’re struggling to keep up with multiple loan payments, you may want to explore refinancing or debt consolidation. These options can simplify your debt obligations and potentially reduce your monthly payments. Here’s a little bit more insight on how they work:
Refinancing
This involves taking out a new loan with terms that are more conducive to your current financial situation(such as a lower interest rate or longer repayment term) to pay off your existing loan. Refinancing can reduce your monthly payment, but it may extend the length of your loan and result in more interest over time. It is important to crunch the numbers before going down this road.
Debt consolidation
This allows you to lump several different debts into one managable loan, with one payment, which tends to have a lower interest rate. This can help you can streamline your payments and potentially reduce the amount you pay each month. Again, it is important to crunch the numbers to see if it makes sense to save money.
Both refinancing and consolidation can be useful tools if your credit score is still in good standing and you qualify for better loan terms.
6. Seek Credit Counseling
If you still have questions and are unsure of the best plan of action to help with your debts, consider seeking professional help. There are several different nonprofit credit counseling agencies available to assist and could be a great resource to consider. A credit counselor can help you create a budget, prioritize your debts, and explore options for dealing with creditors.
Many credit counseling agencies offer services for free or at a low cost.
7. Cut Non-Essential Expenses
During financial difficulties, it’s important to look at your budget with a fine tooth comb and cut back on non-essential expenses. While this may not solve your problems entirely, reducing discretionary spending can free up some funds for loan payments or essential bills.
Some areas where you might find savings include:
- Entertainment subscriptions (e.g., streaming services, gym memberships)
- Dining out
- Shopping for non-essential items (e.g., clothing, electronics)
Redirect any money you save toward covering your loan payment or other priority expenses.
8. Seek Additional Income Sources
If your current income isn’t enough to cover your loan payments, consider looking for a side hustle or additional sources of income. This could be a temporary side job or selling unused items. Even small amounts of extra income can help you get through a tough financial period.
9. Avoid Taking on New Debt
When faced with financial difficulties, it’s often tempting to take out a new loan or use credit cards to make ends meet. However, this can quickly get out of hand and become an even bigger problem.
10. Know Your Rights
If you’re struggling to make payments, it’s essential to know your rights. Laws do vary depending on the country or state, so it is important you know the rights of your region, but there are often protections in place for consumers dealing with financial hardship.
For example, in the U.S., the Fair Debt Collection Practices Act (FDCPA) protects borrowers from harassment by debt collectors. If a lender threatens legal action, you should understand the process and your options, such as working with a lawyer or financial advisor to negotiate better terms or protect your assets.
Conclusion
Missing a loan payment can be stressful, to say the least, but with proactive steps, you can manage the situation effectively.
By assessing your finances, communicating with your lender, and exploring solutions like loan modification or refinancing, you can get back on track and minimize the impact on your financial health. It’s also essential to plan for the future by building an emergency fund and creating a budget to avoid similar difficulties down the road.
You might also be interested in: Managing Loan Repayment: 8 Strategies To Keep You on Track
