How can I manage my loan repayment?

If you’re new to the United States, you’ll quickly notice that loans play a big role in the finances of individuals and businesses. Whether it’s a personal loan, home loan, car loan, or small business loan, loans are one of the most common ways to finance big purchases and investments.

One thing all loans have in common is that they must be repaid. For instance, mortgage payments are typically due on the 1st of each month, while a small business loan might have a due date on the 15th. Credit card payments often have a due date near the end of the month, like the 25th. Missing these dates can lead to additional costs and negatively impact your credit score.

While this might seem obvious to some people, there are some ideas and details about how to repay loans that are specific to the United States. Understanding how to manage and repay these financial tools can help you avoid late fees and interest charges and improve your credit history, which is essential for financial stability and future opportunities.

However, life can sometimes present unexpected challenges, leading to financial hardship. In such cases, options like loan deferment and forbearance can offer temporary relief. These options allow you to pause or reduce your payments for a short period, giving you time to recover and get back on track. Familiarizing yourself with these concepts can help you navigate difficult times and manage your repayments more effectively.

So, let’s go over these strategies to help you understand your options if you find yourself in a financially difficult situation.

In this guide, we will answer the following questions:

• What is a due date?
• What is a grace period?
• How do late fees work?
• Can I change my due date?
• What are automatic payments?
• What does it mean to refinance a loan?
• Are there fees for refinancing a loan?
• Are there ways to pause your loan payments?
• What is mortgage forbearance?
• What is personal loan deferment?
• Can I pause my student loan payments?
• Can I defer a small business loan?
• What is credit card forbearance?

What is a due date?

To ensure you make your loan or credit card payments on time each month, you need to know the specific date your bank or lender expects you to pay.

A due date is a specific date indicated on loan statements and credit card statements, among other documents. For instance, on your electricity or water bills, the due date is the deadline to pay to avoid service interruptions or late fees.

For a mortgage payment, the due date is typically on the 1st of each month, while a small business loan payment might be due on the 15th. Similarly, on your credit card statement, the due date could be the 25th of the month. These dates indicate when the payment is expected and are crucial to avoid additional costs and maintain a good credit score and financial standing.

What is a grace period?

A grace period is the window of time after your loan or credit card’s due date but before late fees, interest, or penalties are applied.

Grace periods are often seen as a helpful feature of many loan and credit accounts, but it’s important to understand that they’re not legally required. Instead, they are provided by lenders as a courtesy to borrowers.

The specifics for each grace period are different depending on the type of loan and which bank or lender you use. You should carefully review your loan contract or cardholder agreement to see how long your grace period lasts and the conditions under which they apply.

For example, student loans often come with a six-month grace period after graduation before students need to make their first payment. Another example is Chase Bank’s grace period for mortgage payments, which is when homeowners have 15 days to make a payment without a late fee. Likewise, Wells Fargo usually gives customers a 10-day grace period on personal loans, although this can vary from state to state.

It’s essential to review your loan or credit agreement to understand how grace periods apply to your account. If you feel unsure about how your grace period works, the best thing you can do is call the bank or lender and ask them for a detailed explanation.

How do late fees work?

A late fee is a penalty charged by lenders or banks when you don’t make your monthly payment by the due date. You might incur late fees on personal loans, credit cards, mortgages, auto loans, and others if payments aren’t made on time.

These fees are meant to motivate timely payments and are explained in the contract or agreement you signed when you received your loan. If there are any changes to late fees, lenders are required to inform you in advance and in writing.

Late fees for personal loans and auto loans tend to fall in the range of $25 to $50 if it’s a flat fee. Late fees can also be charged as a percentage, ranging from 3% to 5% of the monthly payment amount. For instance, if your monthly loan payment is $400 and your lender charges a 5% late fee, you would be responsible for an additional $20 fee. This means instead of owing $400, your new total would be $420.

Similarly, late fees for mortgages typically range between 4% and 5% of the total overdue balance. Mortgages are almost always due on the 1st of the month, and as mentioned earlier, there’s usually a grace period that extends to the 15th. So, if your monthly mortgage payment is $2,200 and you wait until the 16th to pay it, you would likely need to pay a late fee of $110, which is 5% of $2,200.

Can I change my due date?

Another thing you might be able to do to make your loan payments on time is to change the due date.

However, be aware that not all bills can have their due dates adjusted. For mortgages, the cycle dates and due dates are fixed from the day a homeowner first gets approved for their loan and usually cannot be changed. For other types of loans or lines of credit, changes to cycle dates can typically only be made once during the life of the loan or line of credit. So, you’ll want to be careful if you choose to make use of this option.

Adjusting your bill due dates can make managing your finances easier. If you have multiple bills due at different times, you may feel like you’re always making payments and can’t keep up. Or, you might struggle if bills fall between paychecks when you’re running low on cash. To simplify things, you can change your due dates to better fit your schedule.

You might consider changing due dates so all your bills are due on the same day each month. This can streamline your payments, as you’ll only need to handle them once a month, making it easier to keep track.

Alternatively, you can spread out payments throughout the month. By arranging due dates so that payments are staggered, you can avoid the burden of paying large sums all at once, which can help manage your budget better.

Another option is to align due dates with your payday or maybe one or two days after you get paid. Setting due dates to match your pay schedule ensures that bills are paid shortly after you receive your paycheck, so you have the necessary funds available. In the end, it really depends on what suits your needs.

Start by writing down your pay dates and amounts, then list each bill and its current due date. Decide the best times to adjust your due dates based on this information. By making these adjustments, you can better manage your cash flow and reduce the risk of missing payments.

What are automatic payments?

Automatic payments, sometimes called “autopay,” is a feature that automatically deducts your loan payments from your bank account on a scheduled date. This ensures that you never miss a payment.

Autopay offers several advantages for managing your bills and credit accounts. For one thing, it’s convenient because payments are automatically handled, so you don’t have to remember due dates or risk late fees. Automatic payments can also help build your credit, as on-time payments are crucial for a strong credit score.

Setting up autopay is usually simple and can be done online, through an app, or over the phone. After logging into your account, navigate to the payment options, select autopay, and choose the payment amount and date that works best for you. This way, you can automate your finances and avoid the hassle of manual payments.

Some lenders, such as SoFi, LightStream, and Universal Credit, offer lower interest rates if you set up automatic payments, often called an autopay discount. Autopay allows your monthly payments to be automatically deducted from your bank account and sent directly to your lender. This can be especially helpful in avoiding the risk of missing a payment and incurring late fees. In fact, many lenders provide an interest rate reduction, typically around 0.25% off the APR, just for enrolling in autopay.

What does it mean to refinance a loan?

Refinancing a loan means taking out a new loan with better conditions to pay off your current loan. Usually, when people refinance a loan, they procure a new loan from a different lender. For example, if you received a personal loan through Wells Fargo and you want to refinance it, you might get your new loan from Bank of America. You could then use your new loan to pay off the old loan. However, it is possible in some cases to refinance a loan through the same lender. But you might be asking, why would a borrower want to refinance a loan? There are multiple reasons to refinance a loan, so let’s discuss them.

Refinancing a loan for a lower monthly payment

For starters, you might want to refinance your loan if you cannot afford your monthly payments. This option should be considered a last resort because the borrower will most likely pay more money in interest over the long term. However, if you need to take this route, here’s how it would work.

Let’s imagine that you received a loan for $1,000 from Wells Fargo with an interest rate of 10% and a loan term of 2 years. Your monthly payment would be about $45.84, so over the course of 24 months, you would end up paying $1,100.16.

If you cannot make the payment of $45.84 because it requires too much from your monthly budget, you might want to refinance your loan. In this case, you could go to Bank of America and get a new loan for $1,000 with an interest rate of 12% and a loan term of 3 years. You would then use the funds from your Bank of America loan to pay off your Wells Fargo loan. With your new loan, your monthly payment would be $33.25 over the course of 36 months, and you would end up paying $1,200.24 by the end of your loan term.

As you can see, there are pros and cons to this scenario. With the new loan from Bank of America, you will have a more affordable monthly payment of $33.25 rather than $45.84. However, in the end, you’ll pay $1,200.24, which is higher than your original loan, which would have been $1,100.16 by the time you pay it off.

While refinancing a loan for a lower monthly payment is not less expensive overall, it can make your day-to-day life easier by requiring less of each paycheck.

Refinancing your loan for a better interest rate

A borrower might consider refinancing their loan when their credit score has improved, allowing them to qualify for a better interest rate. This is because lenders see you as a lower-risk borrower, which can lead to a better interest rate. Your higher score demonstrates you’ve been responsible with credit, making it more likely that you’ll repay the loan on time.

For example, imagine you have a $5,000 personal loan with two years remaining and a 15% interest rate. Over the course of the next 24 months, you’d be paying $750 in interest. But if your credit score has gone up, you could potentially refinance that same loan at a new rate of 10% interest. With this new rate, your total interest would now only be $500. By refinancing, you’d save $250 in interest over the life of the loan.

Plus, this could also result in you having a lower monthly payment if you keep the same loan term. For example, with your $5000 loan and 15% interest rate, your monthly payments would be around $240 a month over 24 months. On the other hand, if you have a 10% interest, your monthly payment would be about $220. This may not seem like a lot of money, but your savings could be significant on larger loans like car payments or mortgages.

Are there fees for refinancing a loan?

If you’re considering refinancing a loan, there are a few other costs to think about that could reduce your savings.

For example, some loans have something called “prepayment penalties” or “early repayment fees.” These fees are designed to compensate the lender for the interest they lose when a loan is paid off ahead of schedule. Usually, the lender will have to pay between 1% and 5% of the remaining loan amount. So, it’s smart to ask your lender about all these details before refinancing to make sure it’s worth it for you. If your prepayment penalty is higher than the money you might save by refinancing, then you’d want to just leave your current loan as it is.

Origination fees can also increase your loan cost anywhere from 0.5% up to 12% of the total amount. These fees tend to be higher on smaller loans. So, you must consider if this fee will cost more than the amount of money you potentially save by refinancing.

Consider a $10,000 personal loan with a 5% origination fee. This would mean an extra $500 charge. If the lender deducts the fee from the loan amount, you will receive $9,500 instead of the full $10,000. Alternatively, if the lender adds the fee to your loan principal, your total loan amount would be $10,500. As a result, you’d be paying interest on the $500 fee along with the borrowed amount, spreading the cost of the origination fee over the life of the loan through your monthly payments.

Before taking out a new loan to cover the cost of the old loan, sit down and calculate the cost of things like prepayment fees and origination fees. If they outweigh your savings, it may not be worth it to refinance.

Are there ways to pause your loan payments?

Sometimes, life’s challenges make it difficult for borrowers to keep up with loan payments. For instance, an accident or medical condition might prevent you from working, or you could be facing financial hardship because you were laid off from your job.

In these situations, you can often have your loan payments paused through programs known as loan forbearance or deferment. These options are almost interchangeable, but there are some slight differences between the two.

Forbearance allows you to pause or reduce payments during a period of financial hardship, but interest continues to accrue during this time, which increases the total amount you’ll owe in the end.

Deferment, on the other hand, also pauses payments, but depending on the lender interest may not accrue while the payments are deferred. After the deferment period, regular payments resume, often with an extended loan term.

The primary distinction between the two lies in whether interest accrues during the paused period and how that impacts the total loan balance. If you’re seeking loan deferment or forbearance, the most important thing to do is talk to your lender to see exactly how they handle pausing your loan payments.

Now, let’s look at some real world examples of specific types of loans and how borrowers can have their payments paused.

What is mortgage forbearance?

Mortgage forbearance allows you to temporarily pause or reduce your mortgage payments if you’re facing financial difficulties such as job loss or illness. Typically, forbearance lasts up to six months, providing relief by either lowering your payments or suspending them for a set period. Keep in mind that forbearance is not a forgiveness of debt. You’ll need to repay the missed or reduced payments eventually, and interest will continue to accrue during the forbearance period.

It’s important to arrange forbearance with your lender before missing any payments to avoid negatively impacting your credit. While forbearance itself typically doesn’t harm your credit score, missed payments before arranging forbearance can lead to a delinquent status. When the forbearance ends, you’ll need to follow the agreed-upon terms to make up the missed payments, which could involve a lump sum, a repayment plan, or an extension of your loan term.

To seek mortgage forbearance, start by gathering documents that detail your financial hardship, such as bank statements, medical bills, or a layoff notice. Next, reach out to your mortgage lender or servicer’s loan relief department to request forbearance or discuss other available relief options. Make sure to keep detailed records of all communications with your lender and obtain a written agreement for the forbearance before you stop making payments.

What is personal loan deferment?

Similar to mortgage forbearance, many lenders offer short-term deferment plans if you’re struggling with personal loan payments due to financial difficulties. These plans allow you to pause your payments temporarily while extending your loan term, giving you a break from your regular monthly payments. However, keep in mind that if your lender charges interest on deferred payments, you could pay more in the long run.

Loan deferment lets you delay payments without breaching your loan agreement. Typically, this involves extending your loan term by a specified period, like up to 90 days. During this time, interest might continue to accrue, potentially lengthening your repayment term beyond the original schedule.

To apply for deferment, you’ll need to contact your lender to discuss your options. You may need to provide proof of financial hardship, such as unemployment documentation or medical evidence of an illness that prevents you from working. As you wait for a decision, you will still need to maintain your loan payments. If deferment is granted by your lender, make sure you understand exactly how it might affect your repayment costs.

Deferred payments should not affect your credit score if properly handled. However, if you stop making payments before the deferment is approved, your credit could be negatively impacted. If deferment isn’t the best option, you could consider alternatives like refinancing or consolidating your loan, which might lower your interest rate and simplify payments.

Can I pause my student loan payments?

When you’re struggling to make your student loan payments, you might be able to take a temporary break from repaying them. You’ll need to choose between deferment and forbearance. As discussed above, the main difference is that during forbearance, your loans will continue to accrue interest, while deferment may allow you to pause your payments without accruing interest.

Deferment is often tied to specific situations, like being enrolled in school at least half-time, facing unemployment, or serving in the military. If you meet the necessary criteria, your loan servicer is required to approve the deferment. Loans can be deferred for up to three years, and in some cases, such as with subsidized loans, interest will not accrue during this period. Deferment provides a bit of a safety net, allowing you to pause payments without adding to your balance, at least for some loan types.

Forbearance, on the other hand, is a bit more flexible in terms of eligibility, but interest continues to accrue on all loans, whether subsidized or not. Forbearance typically lasts up to 12 months, but you can reapply if you’re still facing financial difficulties. However, unlike deferment, forbearance is often at the discretion of your loan servicer unless it falls under specific categories like mandatory forbearance, which can apply to those serving in the National Guard or participating in a medical internship.

If neither deferment nor forbearance seems like the right fit, there are other alternatives to explore. For example, income-driven repayment plans can reduce your monthly payments to as low as $0 based on your income, allowing you to manage your debt without pausing payments.

Another option is student loan consolidation, which simplifies multiple loans into one manageable payment. You might also explore student loan forgiveness programs, which could cancel part or all of your balance, depending on your eligibility and profession.

Choosing between deferment and forbearance depends on your financial situation. If your hardship lasts for a long time and you qualify for deferment, especially with subsidized or Perkins loans, it may be a better option because you can avoid additional interest charges. For more temporary issues, forbearance could be the better choice, but you’ll need to consider how the interest adds up. If possible, paying at least the interest during this time will help reduce the overall cost of pausing your payments.

Can I defer a small business loan?

Deferring a small business loan involves temporarily pausing or reducing loan payments for a specific period.

The business must demonstrate that it is experiencing short-term financial difficulties or cash flow issues. The eligibility criteria can vary depending on the lender and the loan terms. There are generally two types of deferments.

An interest-only deferment allows the business to make payments only on the interest while postponing the principal payments.

A complete payment deferment means both interest and principal payments are postponed during the deferment period.

Deferments are temporary and often last between 30 and 90 days, though this can vary based on the lender and the business’s circumstances. During this period, interest continues to accrue. Once the deferment ends, the business will need to resume regular payments, and the repayment schedule might be adjusted to reflect the missed payments.

In order to apply for a deferment, a business typically needs to provide financial documents to the lender to prove their need. These documents may include tax returns, balance sheets, and income statements. The lender will review these to determine if deferment is appropriate.

For detailed information and guidance tailored to your situation, it’s best to speak directly with your lender. They can provide insights into the requirements and implications of deferring your loan.

What is credit card forbearance?

Credit card forbearance can give you extra time to pay off your credit card balance. Your credit card company might help by pausing your monthly payments, lowering interest rates, or waiving fees for late payments.

Credit card forbearance can be helpful if you need a break to catch up on payments, but it’s only a short-term solution. It can improve your cash flow temporarily, which will give you more time to pay off your debt and prevent further damage to your credit score. But it’s good to remember that interest may still add up. You might also find that your credit card issuer won’t allow you to make new purchases during forbearance, depending on their rules.

To apply for credit card forbearance, you can call the number printed on the back of your card. Your credit card issuer may not list all forbearance options online, so talking to a representative on the phone is usually helpful. Ask about different options available to you based on your financial situation.

Credit card forbearance usually doesn’t affect your credit score directly, but how you handle it can make a difference. Other lenders might see that you’re in a forbearance program because this information is reported to credit bureaus like Equifax and Experian. If you manage your forbearance well, it can help your credit score by improving your credit utilization ratio. However, if you fail to use your forbearance to catch up on your credit card payments, save money, or find a new source of income, it can hurt your score. This is especially true if your card gets canceled or you miss payments.

Credit card forbearance can be a useful tool to help you manage your finances when needed. While it’s a temporary measure, it gives you the chance to catch up on payments and protect your credit score. By staying proactive and communicating with your card issuer, you can make the most of this opportunity and work towards a stronger financial future.

Conclusion

If you’re new to the U.S. and you’ve taken out a loan, navigating the repayment process can feel overwhelming. The good news is that there are several tools to help you through challenging financial times. By staying on top of due dates, understanding grace periods, and setting up automatic payments, you can manage your loans and credit more effectively, even when things get tough.

If you encounter financial difficulties, options like deferment, forbearance, and refinancing can offer relief and help you manage your payments. It’s important to weigh the benefits and costs of these options and consult with your lender to understand their impact. By staying proactive and informed about your choices, you can avoid unnecessary fees and keep your finances on track.

As you continue to explore financial management, keep an eye out for our next article. We’ll dive into the essentials of starting your own business in the U.S., covering everything from registration to selecting the best legal structure for your needs. Whether you’re considering a sole proprietorship, LLC, or corporation, we’ll help you understand how each option impacts your business’s liability, taxes, and operations.

Author: Aaron Randolph | LinkedIn