Life can sometimes make keeping up with monthly loan payments difficult. Job loss, illness, or unexpected expense may lead you to negotiate a loan restructure with your lender.
A restructured loan involves adjusting your original loan terms to make payments more manageable and avoid delinquencies or defaults, which significantly harm your credit. Common methods include:
- Forbearance: Temporary reduction or pause of payments, with interest continuing to accrue. For details, see our Forbearance Agreement article.
- Deferment: Temporary payment suspension, often used with student loans where interest may not accrue during deferment. Learn more in Student Loan Deferment.
- Loan Modification: Permanent changes such as reduced interest rates or longer terms to lower payments. Our Mortgage Loan Modification glossary entry explains this in depth.
When a loan is restructured, lenders update the credit bureaus with notes reflecting the changes. Instead of marking payments as late, statements like “Account in forbearance” or “Loan modified under a government plan” appear on your credit report. This clarifies you are actively working with the lender rather than defaulting.
During the COVID-19 pandemic, provisions in the CARES Act mandated lenders report accounts in forbearance as current for loans that were timely before the hardship (source: Consumer Financial Protection Bureau). This protected many consumers’ credit scores during the crisis.
Typical credit report notations include:
| Restructuring Type | Description | Credit Bureau Reporting |
|---|---|---|
| Forbearance | Temporary pause or reduced payments | Noted as “Account in forbearance,” payments can be reported as current if compliant |
| Deferment | Temporary payment suspension, common with student loans | Listed as “Deferred,” account not delinquent |
| Loan Modification | Permanent term changes lowering payments | “Loan modified” note, reported current when payments are made on time |
Regarding your credit score, restructured loans are generally less damaging than missed payments or defaults:
- Positive: Maintaining payments under new terms sustains a positive payment history, which makes up 35% of your FICO® Score (source: MyFICO).
- Negative: Some scoring models may temporarily lower your score due to the presence of hardship indicators, but this impact is usually far less severe than a foreclosure or repossession.
Consistent, on-time payments under the new agreement will help your credit recover over time.
Example:
David, a small business owner, secured a six-month forbearance during a slow season. His credit report noted “Account in forbearance.” His credit score dipped mildly by about 15 points, but because he avoided late payments, it quickly rebounded after resuming payments.
Key Tips:
- Contact your lender immediately if you face hardship.
- Get all restructuring agreements in writing.
- Make timely payments on the modified loan to avoid damage.
FAQs:
Q: How long does a restructured loan stay on my credit report?
A: Notes can remain up to seven years but have diminishing impact over time.
Q: Does restructuring hurt my credit?
A: It’s less harmful than late payments or default, representing responsible management.
Q: Can I get new loans after restructuring?
A: Yes, though recent modifications might slightly affect approval for large loans temporarily.
For further information on related topics, explore our Loan Modification Processing Time and Student Loan Forbearance articles.
Authoritative info is also available at the Consumer Financial Protection Bureau: Managing Your Loans During COVID-19 and from MyFICO.com.
