Loan shortfalls can be a good thing.John Dickinson, DebtX
For many people refinancing can be a great option to provide additional funds to consolidate their debts and reduce their overheads. With debts such as credit cards attracting high interest rates, it can save people significant amounts of money to replace such debts with a single loan with a lower interest rate.
When applying for a new loan there are a number of factors that dictate that persons borrowing capacity such as what they earn, the status of their credit file, and the value of their property.
This leads to situations where the amount they are able to borrow falls short of what is required to payout all the debts they were hoping or needing to consolidate. The good news is there are situations were creditors will agree to reduce what they are owed in order to allow a refinance to take place.
While in general terms being behind with debts is not a good thing, when it comes to credit providers agreeing to discounting a debt for a delinquent account can actually be a positive thing.
For example, let’s say Sam has a credit card debt that has fallen into arrears. The credit provider has learned that Sam is unwell or has been made redundant and is struggling to find work, or he is leaving to live overseas. Such situations can be a real problem for a credit provider with unsecured debt such as a credit card or personal loan, because other than listing a default on Sam’s credit file and commencing legal action, there is little else they can do to recover what is outstanding. It is in situations such as this where a credit provider will likely accept a lesser amount to settle the matter.
Let’s look at an example:
Robert has some unsecured loans he is having trouble keeping up with.
- Credit Card 1 $15,000.00
- Credit Card 2$10,000.00
- Personal Loan $35,000.00
Robert has recently been retrenched and although he was able to secure a new job, the income is significantly less that his previous role. Unfortunately Robert is unable to maintain payments on his debts at the required level.
Trying to get himself through this difficult situation, Robert consulted a mortgage broker who was able to arrange a new home loan of $380,000.00 that is secured by his house. The current first mortgage is $350,000.00 which leaves only a $30,000.00 surplus to payout his unsecured debts totalling $60,000.00.
Many people like Robert think that in this situation it’s all over and there’s no way the refinance can happen, in other words they think they are stuck.
Robert’s creditors have a decision to make. They could refuse to budge and pursue Robert for what is owed, however given Robert’s position there is little chance of the situation improving, so despite their attempts the accounts would most likely continue to deteriorate and while the amounts owed would increase on paper, they would have little chance of ever recovering the debt in full.
On the other hand, they could agree to discount the account balances and allow the refinance to take place. This would allow them to receive some cash now rather than continue to tie up resources& further expenses trying to recover more. They know full well that this is likely to be the best outcome for them.
There is no doubt that given the right circumstances credit providers will agree to discount debts, sometimes significantly, when they feel that this is their best option.
Loan short fall do not always need to be the end of the line, in fact they can sometimes provide people like Robert with a much needed second chance.
When provided with evidence of a loan approval from a funder, most creditors will agree to reduce their debt to allow the refinance to take place as they recognize this is their best prospect of getting paid something in the near future.
Because of this, loan shortfalls need not always mean the facility cannot proceed.